Earnings per share (EPS) is a number describing the portion of a company’s profit that is allocated to each individual stock. Earnings per share is the most commonly used metric to describe a company’s profitability.
EPS is also the single most important number that affects share prices. It is closely followed by both investors and analysts, which use future estimates of earnings per share to predict movements in the stock price. When this number increases year-over-year, it is usually followed by an increase in the stock price.
In simple terms, it is the amount of profit that each stock in the company “owns.” If all the company’s profits were distributed to shareholders, this is how much you would get for each stock you own.
Formula: How to Calculate Earnings Per Share
Earnings per share is calculated by dividing the company’s total earnings by the total number of shares outstanding.
The formula is simple: EPS = Total Earnings / Outstanding Shares.
Total earnings is the same as net income on the income statement, also referred to as profit. You can find net income and shares outstanding on a company’s income statement.
As an example, Apple had $19.965 billion in earnings last quarter, with 4.773 billion shares outstanding. This makes the quarterly EPS: 19.965/4.773 = $4.18.
You can also find the earnings per share on stock information websites like Google Finance by typing in the company name or ticker symbol and clicking on “Financials.”
Basic vs diluted earnings per share
There are often two EPS numbers reported, basic earnings per share and diluted earnings per share. There are some important differences between the two:
- Basic: Includes all of the company’s outstanding shares.
- Diluted: Includes all outstanding shares, as well as stock options, warrants and restricted stock units that could become outstanding shares in the future.
For this reason, basic EPS is usually slightly higher than diluted. It is generally better to look at the diluted figure when making investment decisions.
What factors affect EPS
Companies get increased earnings per share when either their earnings go up, or when the total number of shares outstanding goes down.
Earnings can go up due to sales growing faster than expenses, or when the company becomes more profitable by cutting costs.
Shares outstanding can decrease due to share buybacks, or they can increase when the company is issuing new shares.
Earnings per share is commonly used, but it has certain limitations.
For example, unprofitable companies have a negative EPS, making the metric less useful. However, you can use the trend for this number to see if the company is on the way to becoming profitable.
The number can also be misleading and manipulated with accounting tricks. For example, many companies that are spending more cash than they are taking in can be made to seem profitable with a positive EPS number.
For this reason, it is a good idea to also look at other profitability metrics, such as operating income and free cash flow.
More facts about earnings per share
- Earnings per share is used to calculate the PE ratio, the most commonly used valuation metric for stocks.
- Companies often report “adjusted” EPS where they remove certain expenses from the calculation. This can sometimes mislead investors.
- A weighted average of outstanding shares is often used to calculate shares outstanding, because this number tends to fluctuate.
- When a company pays preferred dividends, this number is subtracted from the total earnings figure before calculating EPS.
- Earnings per share can be reported for each quarter, for each fiscal year, or it can be projected into the future with a forward EPS.
- The most commonly used version is the trailing twelve month (ttm) EPS, which can be calculated by adding up the number for the past four quarters.