Earnings Per Share Formula Examples, How to Calculate EPS

To put it simply, earnings per share (EPS) is a measure of a company’s profitability. When investors compare a company’s EPS against other businesses in the same industry, they do it to determine whether the stock is reasonably valued or not. Companies’ financial health can be evaluated using multiple ratios and methods.

The higher a company’s P/E ratio, suggests that higher earnings are expected. But again, this isn’t a guarantee that a company’s performance will meet or exceed expectations. And a higher price-to-earnings ratio could also suggest that a company is overvalued. When comparing different stocks, it’s helpful to use the EPS ratio as a guide. If a company is posting year-over-year continued EPS growth, that could be a sign that it can sustain profits over time. Conversely, if capital budgeting a company has a downward trending EPS or is reporting a negative EPS, that could indicate that it’s stuck in a pattern of losing money.

Example 2 – EPS computation with cumulative preferred stock:

• 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.
• To determine the total number of common shares, we calculate the weighted average number of ordinary shares outstanding.
• In short, if earnings go down or the number of shares increases, EPS will decline.
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• For example, sometimes a lender will provide a loan that allows them to convert the debt into shares under certain conditions.

Because it includes everything that could dilute the earnings per share, diluted EPS is more conservative and offers a fuller view of potential profitability. Additional information about your broker can be found by clicking here. This is not an offer, solicitation of an offer, or advice to buy or sell securities or open a brokerage account in any jurisdiction where Public Investing is not registered. Apex Clearing Corporation, our clearing firm, has additional insurance coverage in excess of the regular SIPC limits.

The share price of a stock may look cheap, fairly valued or expensive, depending on whether you look at historical earnings or estimated future earnings. Regardless of its historical EPS, investors are willing to pay more for a stock if it is expected to grow or outperform its peers. In a bull market, it is normal for the stocks with the highest P/E ratios in a stock index to outperform the average of the other stocks in the index.

• The Basic EPS is a profitability ratio used to measure the residual net income allocatable to common shareholders on a per-share basis.
• A higher P/E ratio may indicate expected higher earnings or possibly suggest the company is overvalued.
• When you’re analyzing a stock, EPS may give you a quick snapshot of the company’s financial health and profitability on a per-share basis.
• EPS is a simple, efficient way to analyze a company’s growth trends as well as how it compares to its peers.
• This can appear to show EPS growth, even while earnings may be static or declining.

Impact of preferred dividends on computation of earnings per share (EPS)

This needs to be taken into account when comparing the earnings of companies against each other. Note that the earnings could amount to a loss (as opposed to a profit) attributable to ordinary shareholders. In general, investors are rather looking at how a company’s EPS has evolved over time or how it stacks up against their rivals’ EPS, as well as at the increase rate of the earnings. Even though EPS can give investors a quick overview of profitability, they should go further and consider other metrics as well.

Although earnings per share (EPS) is a widely used metric, it has several shortcomings that can sometimes mislead investors. Its fundamental shortcomings include its inability to capture long-term value, its vulnerability to accounting decisions, and its susceptibility to financial engineering. In addition, EPS often ignores important measures of financial health and fails to account for inflation, which can lead to an inappropriately positive assessment of a company’s financial health.

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. Other matrices that are mostly considered along with earnings per share ratio to judge the justification of stock price include dividend yield ratio and annual dividend per share. The formula in the table above calculates the basic EPS of each of these select companies. Basic EPS does not factor in the dilutive effect of shares that could be issued by the company. Earnings per share, or EPS, is a common financial ratio calculated by dividing a company’s annualized net profit (minus operation expenses) by the total number of outstanding common shares.

Earnings Per share Formula

When EPS ratios undergo sharp increases or decreases, on the other hand, that could suggest that a company’s profitability is less stable or sustainable. When deciding where to invest your money, there are different ratios you can use to find the right companies to back. One of them is earnings per share (EPS), which is one way to measure a company’s profitability. But what is a good EPS and what influences a particular company’s ratios? Asking those kinds of questions can help you better evaluate a company and its profit potential when deciding whether to add it to your investment portfolio.

Understanding how to find EPS is crucial for evaluating a company’s profitability. Dilutive securities refer to any financial instrument that can be converted or can increase the number of common shares outstanding for the company. Dilutive securities can be convertible bonds, convertible preferred shares, or stock options or warrants. When reviewing a company’s income statement, knowing the difference between EPS and diluted EPS can help determine the calculation you’ll want to use to get the most accurate information.

Company

Thirdly, the Earnings Per Share are not necessarily directly related to the market value of a company and its stock. The correlation between EPS growth and shareholder value trial balance: definition and overview is unclear because the calculation is not directly linked to the objective of maximising shareholder wealth. In fact, the widespread use of the EPS and P/E ratios in the investment community may be largely attributed to their ease of use, because the EPS otherwise has a number of limitations.

It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. Antonio Di Giacomo studied at the Bessières School of Accounting in Paris, France, as well as at the Instituto Tecnológico Autónomo de México (ITAM). He has experience in technical analysis of financial markets, focusing on price action and fundamental analysis.

The formula involves dividing the company’s net income by the number of outstanding shares. Specifically, EPS is calculated as (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares. This calculation provides a per-share profit figure, which is essential for investors when evaluating a company’s earnings performance.

Remember that a higher EPS can suggest growth and stock price increases. However, nothing in investing is given, and EPS doesn’t necessarily guarantee anything. The more metrics you use to compare stocks, the more accurate a picture of their health you may be able to create. Looking closely at EPS, price to earnings and other measures can also help you spot and avoid value traps if you follow a value investing strategy.

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Only the current period’s dividends should be considered, not any dividend in arrears. For non-cumulative preferred shares, the dividends should only be deducted if the dividend what is a favorable variance what it means for your small business has been declared. EPS can impact dividends because companies with higher EPS are more likely to have the profits needed to pay dividends to shareholders. However, not all companies with high EPS pay dividends, as some prefer to reinvest earnings back into the business for growth. For public companies, EPS is a regularly reported figure that analysts use to track profitability trends and evaluate growth potential. Bond AccountsA Bond Account is a self-directed brokerage account with Public Investing.

Earnings Per Share (EPS) is a financial metric representing the portion of a company’s profit allocated to each outstanding share of common stock. ETFs & ETPs.Before investing in an ETF, you should read the prospectus carefully, which provides detailed information on the fund’s investment objectives, risks, charges, and expenses and unique risk profile. Performance data represents past performance and is no guarantee of future results. Investment returns and principal value will fluctuate such that an investment, when redeemed, may be worth more or less than the original cost.

Last updated: Junho 10, 2025