EPS Earnings Per Share: Definition and Formula

Earnings per share takes into account common stock only; the preferred stock does not influence the value of the shares. Therefore, to summarize the net impact on the earnings per share (EPS) line item, new stock issuances cause a company’s EPS to decline, whereas stock buybacks result in an artificially higher EPS. Stock buybacks and new stock issuance are two methods for publicly-traded companies (post-IPO) to directly impact their number of outstanding shares. An important aspect of EPS that is often ignored is the capital that is required to generate the earnings (net income) in the calculation.

Basic Earnings Per Share Formula

1. In the example above, the EPS calculator showed that Tesla earned $3.98 per share.
2. It’s an essential measure, akin to checking the pulse of a company’s financial health, giving investors a quick and clear view of a company’s profitability.
3. It may also exclude the cost of share-based compensation for employees, since that compensation can vary widely from year to year.
4. If a company misses or beats analysts’ consensus expectations for EPS, its shares can either crash or rally, respectively.
5. It’s important to supplement PE ratio analysis with other methods of researching stocks.

These don’t count toward the total shares outstanding, but they can become common stock shares if exercised. Earnings Per Share (EPS) is reported on a company’s income statement. It is often reported on a basic and diluted basis, which takes into account the impact of dilutive https://www.simple-accounting.org/ securities such as stock options and convertible debt. Diluted EPS considers this factor and combines all the securities that could convert to common stock in the future. The formula in the table above calculates the basic EPS of each of these select companies.

What Is a Good EPS?

This measurement figures into the earnings portion of the price-earnings (P/E) valuation ratio. The P/E ratio is one of the most common ratios utilized by investors to determine whether a company’s stock price is valued properly relative to its earnings. When calculating the quarterly EPS for a company, using the weighted average shares outstanding for the time period may give you a better picture than the shares outstanding on the last day of the quarter. By considering both of these data points—analyzing both the number of shares outstanding and a company’s total earnings—investors get a more clear picture of how valuable a stock actually is.

Everything You Need To Master Financial Statement Modeling

Then divide that amount by the average number of outstanding common shares. Investors purchase the stocks of a company to earn dividends and sell the stocks in the future at higher prices. The earning capability of a company determines the dividend payments and the value of its stocks in the market.

EPS and Dividends

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 section will contain the EPS figures on a basic and diluted basis, as well as the share counts used to compute the EPS. The diluted EPS is inclusive of the net dilution from dilutive securities like convertible bonds (and thus, is a more conservative measure of profitability). When looking at EPS to make an investment or trading decision, be aware of some possible drawbacks.

Earnings per share formula

Growth investors typically compare a company’s current EPS to its EPS in the same quarter last year. They might look for a growth stock whose year-over-year EPS growth is higher than others in its industry, or a company whose EPS is growing faster than its share price. To find the P/E ratio, divide the share price by a company’s earnings per share (EPS). A high P/E may suggest confidence in future growth, while a low P/E could indicate undervaluation.

If a company’s most recent quarterly EPS is $0.12, and its EPS in the same quarter last year was $0.09, then it has a quarterly year-over-year EPS growth rate of 33%. Quarterly year-over-year EPS growth is a company’s most recent quarterly EPS divided by its EPS from the same quarter the prior year, minus 1. Annual EPS growth is a company’s EPS over the last year divided by its EPS over the prior narrative report meaning year, minus 1. EPS growth is pretty self-explanatory; it’s a way of measuring how fast a company is growing in terms of its earnings. If you’re comparing one company with another, you’ll want to use diluted EPS if both companies report it. That decrease in value didn’t have anything to do with the banks’ operations, but it still had to be accounted for in their official EPS calculations.

ABC company has had 20K common shares outstanding since the beginning of the year. Moreover, on September 1, ABC enacted a 3-for-2, or 50%, stock split. For example, for FY2021, company ZZZ reported a net income of 5 $billion, 500 million common shares, and 5 million preferred shares. Moreover, the company’s outstanding preferred shares have a face value of $80 and a preferred dividend rate of 8%.

An accounting charge related to a past acquisition (often referred to as a ‘writedown’) could erase profits and lead to a reported net loss. A large, one-time, litigation settlement can lead to a short-term spike in expenses. Basic EPS includes all of the company’s outstanding shares, while diluted EPS includes shares, stock options, warrants, and restricted stock units.

But not all companies report diluted EPS, because not all companies issue dilutive securities such as employee stock options or convertible bonds. In those cases, you’ll want to use basic EPS for company-to-company comparisons. Basic and diluted EPS calculations are both standardized across companies by the Generally Accepted Accounting Principles (GAAP). As an example, let’s look at one of the largest companies in the S&P 500 index.