Earnings Per Share – EPS
Earnings per share is an indicator of profitability of the company and it shows how much of companies earnings pertain to each share of common stock. It is calculated as:
EPS =(Net income – Dividends on Stock)/ average outstanding shares
To make this formula more understandable, here is an example of calculating earnings per share. If the companies profit is 50 million dollars, dividend paid to stock owners is 5 million dollars and company has 20 million shares, the calculation would be: (50$ – 5$)/20shares = 2,25 $/share. It is recommended to use average number of shares or number of shares at the end of the period in order to get the most accurate results. Using the current number of shares in calculation can mislead because of possible change of share number over period. So if in previous example company had 15 million shares in first half of the year and 20 million shares in second half, the calculation would be: (50$ – 5$)/17,5shares =2,57 $/shares or like in previous example, if we use information at the end of the period.
This is one of the most important variables that is used to determine shares price. Nevertheless, EPS can also be manipulated with and it is important to use it in compound with other financial measures and analysis.
Very common terms that are connected with EPS are: price earning ratio, earning per share, price to earning, dividend per share etc.