
For example, companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?
It makes more sense to look at earnings per share (EPS) for use as a comparison tool.
You calculate earnings per share by taking the net earnings and divide by the outstanding shares.
EPS = Net Earnings / Outstanding Shares Using our example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).
It makes more sense to look at earnings per share (EPS) for use as a comparison tool.
You calculate earnings per share by taking the net earnings and divide by the outstanding shares.
EPS = Net Earnings / Outstanding Shares Using our example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).
So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, we need to look at some ratios.
Before we move on, you should note that there are three types of EPS numbers:
Trailing EPS – last year’s numbers and the only actual EPS
Current EPS – this year’s numbers, which are still projections Forward EPS – future numbers, which are obviously projections
Meaning #1: the portion of a company's profit allocated to each outstanding share of common stock
The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.
Calculated as: Net Income-Dividends on preferred Stocks/Average Outstanding shares
In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time.
However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.Diluted EPS expands on the basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
Investopedia Says: Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. For example, assume that a company has a net income of $25 million.
If the company paid out $1 million in preferred dividends and had 10 million shares for one half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million.
Then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation.
Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.
Related Links: The math may be simple, but to make informed investment decisions, investors need to understand the many varieties of EPS and what each represents.
Types Of EPSLearn how this key metric is calculated and how it is used to judge market performance. Earnings Forecasts: A PrimerConsensus estimates can send stocks spiraling - but are they representing reality? Surprising Earnings ResultsCompanies can manipulate their numbers, so you need to learn how to determine the accuracy of EPS. How To Evaluate The Quality Of EPSEPS helps investors analyze earnings in relation to changes in new-share capital. Getting The Real EarningsThese unofficial forecasts hold the potential for insider insight - and investment risk. Whisper Numbers: Should You Listen?Related Links: The math may be simple, but to make informed investment decisions, investors need to understand the many varieties of EPS and what each represents.