If you invest in firms on the stock market, you most likely possess a large number of shares. With the help of our earnings per share calculator, you’ll be able to determine their true worth in a matter of seconds. This program will show you how to compute earnings per share and provide you with an EPS formula that is failsafe.

What are earnings per share?

A firm’s profit is divided by the number of outstanding shares of its common stock to compute earnings per share (EPS). The resultant figure is used to determine a company’s profitability. It is typical for a corporation to declare earnings per share (EPS) that has been adjusted for unusual items and probable share dilution.

The earnings per share (EPS) is the percentage of a company’s total profit that is given to each of its shareholders’ shares. It is one of the most essential factors in determining the profitability of a stock investment.

Comparing the EPS statistics for one firm over a lengthy period of time is one technique to make an informed investing decision. You may also compare the earnings per share (EPS) of many firms in the same industry to determine which is the most lucrative. Earnings per share are calculated using just common stock; the preferred stock has no bearing on the value of the shares.

Earnings per share formula

The earnings per share value are derived by dividing net income (also known as profits or earnings) by the number of available shares. A more detailed computation modifies the numerator and denominator for shares produced by options, convertible debt, or warrants. When the numerator of the equation is updated for ongoing processes, it becomes even more meaningful.

EPS = (net income – dividends on preferred stock) / average outstanding common shares

You’ll see that preferred dividends are subtracted from net income when calculating earnings per share. Because EPS only gauges revenue available to common stockholders, this is the case. As a result, preferred dividends are only paid to preferred shareholders and cannot be distributed to common stockholders.

Earnings per share are usually computed for year-end financial accounts. The weighted average common shares are employed in the computation since firms frequently issue new stock and buy back treasury stock throughout the year. The weighted average common shares outstanding may be calculated by multiplying the starting and ending outstanding shares by two.

How to calculate earnings per share

Earnings per share (EPS) is determined by dividing a company’s net profit by the number of shares of common stock outstanding. Because firms may issue or buy back shares during the year, the real EPS is difficult to nail down. Instead, an average is usually utilized. Because the number of outstanding shares might fluctuate, utilizing an average of outstanding shares provides a more accurate representation of the company’s earnings.

  • Calculate the company’s net profit. Assume the amount is $5.40 billion.
  • Calculate the total amount of preferred stock dividends. We can estimate it to be $400 million.
  • Determine the number of common shares in circulation for this corporation. We have the option of selecting a figure between 250.5 million.
  • Use the following formula to calculate earnings per share:

EPS = (net income – dividends on preferred stock) / average outstanding common shares

EPS = ($5,400,000,000 – $400,000,000) / 250,500,000 = $19.96

Applications of earnings per share

The EPS number is widely employed in the discounted cash flow approach of corporate valuation or in the P/E ratio.

In the stock market, you seek for firms with significant earnings per share growth to uncover fantastic investment possibilities. Therefore, you should specifically seek for firms with an EPS compound annual growth rate of more than 10%.

Earnings per share example

Consider Bank of America’s net income for the fiscal year 2017. (BAC). It had a net profit of $18.232 billion. In addition, it paid $1.614 billion in preferred stock dividends. It has 10.196 billion outstanding ordinary shares on average.

This gives it an EPS of:

Earnings = 18.232 billion−1.614 billion

=16.618 billion (net profit)

EPS = 10.196 billion / 16.618 billion

​=$1.63

​Negative earnings per share

Earnings per share, or EPS, measure how profitable a firm is for its owners. A negative profit per share indicates that the corporation is losing money. Raise your hand if you think it’s a good thing to lose money. No, I don’t believe so. Even Nevertheless, there are situations when a negative EPS is unavoidable.

Businesses do not always make a profit. Instead, they occasionally lose money, resulting in negative earnings. When earnings are negative, EPS is negative as well. A negative EPS indicates how much money the firm lost each outstanding share of stock, which is why it’s also known as “net loss per share.”

A corporation with 100 million shares that loses $16 million has a negative EPS of 16 cents. Of course, no one from the corporation will come to your house and try to con you into selling your stock for 16 cents a share. You will, however, “pay” for the loss in another way: A net loss reduces the firm’s worth, which in turn reduces the stock’s value.

Recommendations for your investments

  1. If you are confident in your investment, you can aim to lower your average cost per share in the stock market. Any subsequent investment return will be bigger since it will be compared to a lower initial cost.
  2. In the stock market, you must also examine the effectiveness of your company’s operations. Measuring the EBITDA margin is one approach to do so. Remember to seek for good and expanding EBITDA margins. That implies a firm that is improving over time and might provide you with a significant return on investment in the near future.
  3. When looking for stocks with consistent profits per share growth, you’ll see that their stock beta is strong. It’s natural, so don’t be startled. Just keep in mind that such stocks will not only give you with bigger returns than the stock market average during bull markets, but they will also come with a larger drop in the event of a market crash.
  4. Buying call or put options is another strategy to profit in the stock market. We propose buying call options on a firm that has shown significant earnings per share growth. On the other hand, if EPS growth is slowing, you might want to consider purchasing a put option. Finally, consider vertical spread options techniques if you choose low risk but want to increase your profits.

FAQ

What are good earnings per share? 

A firm with an EPS rating of 99 has outperformed 99 percent of all publicly-traded companies in the IBD database in terms of profit growth.

What are diluted earnings per share? 

The earnings per share of a corporation are calculated using diluted earnings per share (diluted EPS) if all convertible securities are converted. Dilutive securities are securities that can be converted to common stock but are not common stock.

How to get earnings per share?

The fraction of a company’s profit assigned to each existing share of common stock is called earnings per share (EPS). (net income – preferred dividends) average outstanding common shares Equals EPS (preferred and common stock) for a corporation.

Why are earnings per share important?

One of the most important factors in determining a company’s share price is earnings per share. A high earnings per share (EPS) shows that the firm is profitable and has more money to offer to its shareholders. It’s easy to figure out a company’s basic EPS.