Earnings Per Share Formula Examples, How to Calculate EPS

It is important to always judge EPS in relation to the company’s share price, such as by looking at the company’s P/E or earnings yield. Any stock dividends or splits future value of annuity formula with calculator that occur must be reflected in the calculation of the weighted average number of shares outstanding. Some data sources simplify the calculation by using the number of shares outstanding at the end of a period. EPS is calculated by dividing a company’s net income by the total number of outstanding shares. And so diluted share count equals 10 million shares plus another 500,000 (the 1 million shares underlying options, less than 500,000 theoretically repurchased). Diluted EPS is calculated by dividing the $10 million in net profit by the 10.5 million in diluted shares, giving a result of 95 cents.

In this case, the company or analyst will add the interest paid on convertible debt back into the numerator of the EPS calculation so the result isn’t distorted. To better illustrate the effects of additional securities on per-share earnings, companies also report the diluted EPS, which assumes that all shares that could be outstanding have been issued. A higher EPS often results in an increase in stock price, as it reflects stronger profitability, making the company more attractive to investors. Management may sometimes use accounting tactics to inflate earnings, such as by deferring expenses or recognizing revenue early. reasons to use an outsourced bookkeeping This can lead to an inflated EPS figure that does not reflect the true financial health of the company.

Instead, you could look at the EPS trend over time to see if the company is on its way to becoming profitable, or evaluate other metrics like revenue growth, customer acquisition, book value, etc. Our company’s basic earnings per share (EPS) comes out to be $1.50. The section will contain the EPS figures on a basic and diluted basis, as well as the share counts used to compute the EPS. Earnings forecasts are based on educated guesswork from analysts and are often too rosy, possibly making the valuation look cheap. Historical earnings, on the other hand, are set in stone but may not fairly represent a company’s legitimate growth potential. Rolling EPS represents a compromise, giving investors a blend of both.

Adjusting for Preferred Dividends

In short, if earnings go down or the number of shares increases, EPS will decline. If earnings increase or the number of shares decreases, EPS will rise. For an illustrative, real-life example, the following screenshot below is of the income statement of Apple (AAPL) from its 10-K filing for fiscal year ending 2022. The distinction between the basic and diluted EPS can be seen in the denominator of their respective formula. Rolling EPS gives an annual earnings per share (EPS) estimate by combining EPS from the past two quarters with estimated EPS from the next two quarters. Imagine a company that owns two factories that make cell phone screens.

• Tricks like buybacks or accounting changes can twist EPS figures.
• Yes, a company with low or negative EPS may still be a good investment if it has high growth potential, strong management, or is in a turnaround phase.
• Earnings per share (EPS), a company’s profit divided by the amount of common stock it has in circulation, is one of the most closely observed metrics in investing.
• Historically, they’ve been reliable methods of comparing companies, determining value, and finding buy or sell opportunities.
• For example, adding back interest on convertible bonds and preferred dividends when figuring diluted EPS.
• Get instant access to video lessons taught by experienced investment bankers.

A company with a high EPS compared to its peers is typically viewed more favorably by investors. Boost your confidence and master accounting skills effortlessly with CFI’s expert-led courses! Choose cash book format CFI for unparalleled industry expertise and hands-on learning that prepares you for real-world success. But even though they’re different measures, these ratios are connected. In such cases, the company may be investing heavily in expenses like R&D to grow.

CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path. Let’s say that a company has consistently produced higher EPS figures compared to comparable companies in the same (or adjacent) sector. Therefore, our baseline basic EPS figure following moderately positive performance is $2.10 in 2021. As for the rest of the forecast, we’ll be using various assumptions to show various operating scenarios and the net impact on basic EPS. First, we’ll begin by briefly explaining the operating assumptions used to calculate basic EPS.

With the complexity of diluted EPS calculations, accuracy and foresight are essential in accounting. The price-to-earnings (P/E) ratio and EPS work together but evaluate different things. The P/E ratio is used to analyze a stock’s value, while EPS is used to determine a stock’s profitability. Additionally, you can evaluate EPS based on how it compares to industry peers and its trends over time. Though EPS growth is relative to the broader market and economic conditions, investors generally want to see a company’s EPS grow year over year.

Example 1 – EPS computation without preferred stock:

• But even though they’re different measures, these ratios are connected.
• They help everyone from new investors to large financial institutions.
• Although it seems like a stock that costs more relative to its EPS when compared to peers might be “overvalued,” the opposite tends to be the rule.
• Which type of EPS a company needs to report in its financial statements depends on its capital structure.
• In comparison, after another year of strong performance, basic EPS is $2.42 as a result of the growth of $25mm in net income and a reduction of 10mm shares.

The exercise of those options would add 1 million shares to the basic count. In theory, however, ABC could acquire 500,000 shares with the $10 million in proceeds. First, the exercise price of the options or warrants may be above the trading price. In that case, the shares underlying the options are excluded because, at the moment, they are not going to be exercised. That figure uses net profit adjusted for one-time factors such as fees related to a merger, or other unusual costs.

It may also exclude the cost of share-based compensation for employees, since that compensation can vary widely from year to year. When calculating diluted EPS, we must always consider and identify all potential ordinary shares. The advantage of this comparison lies in how EPS growth showcases a company’s ability to adapt and grow in changing markets. The table above shows the difference between basic and diluted EPS. On the other hand, EPS is an easy-to-calculate, readily available way to interpret how much profit a company makes per share. Companies can also mislead investors by reporting “adjusted” EPS and removing certain expenses from the calculation.

The Pitfalls and Shortcomings of EPS

Watch the short video below to quickly understand the main concepts covered here, including what earnings per share is, the formula for EPS, and an example of EPS calculation. In comparison, after another year of strong performance, basic EPS is $2.42 as a result of the growth of $25mm in net income and a reduction of 10mm shares. Since the basic EPS metric is expressed on a standardized basis, the net earnings of companies can be compared and analyzed – albeit there are shortcomings to be aware of regarding the accounting metric. SEC rules like S-K Item 10(a) guide how to report non-GAAP EPS for SEC companies.

How to Calculate Basic EPS?

Stock investors can further evaluate a company’s EPS by considering it in conjunction with its P/E ratio and determining how the company’s share price is fluctuating relative to its earnings. On a fully diluted basis, our company has a total of 180 million shares outstanding. The number of shares repurchased is calculated by taking the strike price multiplied by the new shares—divided by the market share price. The treasury stock method (TSM) requires the market share price, which we’ll assume is $40.00 as of the latest market closing date. In the next part of our exercise, we’ll determine our company’s diluted earnings per share (EPS). Suppose we’re tasked with calculating the earnings per share (EPS) of a company that reported $250 million in net income for fiscal year 2021.

The dividend on cumulative preferred stock for current period is always deducted from net income while computing current period’s EPS even if management does not declare any divided during the period. However, in case of non-cumulative preferred stock, the dividend is not deducted from current period’s net income unless it is declared by management. The net impact that changes in a company’s net income and the number of common shares have on basic earnings per share (EPS) for a given period can be observed from our modeling exercise. We subtract preferred dividends because EPS is about what common shareholders can earn.

What is EPS?

Spreading your money across industries and companies is a smart way to ensure returns. The markets where people buy and sell stock come in several different flavors. The net dilution equals the gross new shares in each tranche less the shares repurchased. We’ll now move on to a modeling exercise, which you can access by filling out the form below. Rolling EPS shouldn’t be confused with trailing EPS, which mainly uses the previous four quarters of earnings in its calculation. A similar argument could be made if a company had an unusual loss—maybe the factory burned down—which would have temporarily decreased EPS and should be excluded for the same reason.

This guide breaks down the Earnings per Share formula in detail. Analysts, investors and potential stockholders prefer to use earnings per share ratio in conjunction with other relevant ratios. For example, EPS figure is often compared with company’s per share price by computing price earnings ratio (usually abbreviated as P/E ratio). The P/E ratio comparison of different companies reveals the reasonability of the market price of a company’s stock. It indicates whether a particular company’s stock at a certain market price is cheap or expensive in relation to similar companies’ stocks trading in the market.