Tips on How to Calculate Earnings Per Share
There is no doubt that it is helpful to know how to calculate a metric, which is called earning per share (EPS) if you want to compare the stocks between various publicly held companies.
The tools to calculate EPS help the traders to overcome the challenge of Evaluating stocks along with a true apples-to-apples comparison. The EPS of a company is meant to provide a better way to compare the companies & help the traders to make more informed decisions on investment.
What is Earning Per Share?
Earnings Per Share (EPS) is said to be an investor ratio for the net profit attributable to each other ordinary share of a company. Usually, this metric is used to measure profitability to the shareholder at a specific time. In short, you can say that EPS indicates the earning of a company for each share of its ordinary stock. In other words, EPS is the portion of the net income, which will be allocated to each share, if a company paid out all of its profit to the shareholders.
What is a Good EPS?
The shares of a company are considered to be more attractive when the earnings per share are higher for a company. The stock along with earning per share steadily increases with time and is regarded as a more reliable investment as compared to the fluctuation or declining ratio. So,
- High EPS = High Profitability of a Company.
- Continuous EPS Growth = Reliable Investment.
However, there is no specific or ideal EPS figure to be considered as good. Instead previously performance & prospects of a company with its stocks are evaluated by comparing the Earning Per Share growth to:
- Period of previous accounting.
- Similar companies.
- Other investment forms.
- Price of a company share.
Why Earnings Per Share is Important:
There two basic & main reasons that why investors purchase shares in a company and they are:
Receiving of dividend payments.
Sale the stocks at a higher price as compared with the market value, which will be increased in the future to make a profit.
The company earnings drive both its dividend payments & the market value of stocks because it has more money for distribution through dividends or reinvestment into the business. In addition to this, it is used to determine the other essential ratios, which assess the ROI (Return on Investment) into the ordinary shares of a company. And it also includes the price/ earnings ratio, earnings yield & dividend cover.
In fact, since the earnings per share figures are used to figure out the P/ E ratio, a major stock market indicator of performance, it significantly impacts the price of company shares. This is why the earnings per share are said to be a key for investor ratio, which enables the existing & prospective shareholders to assess the previous performance of a company with its stocks, estimate future earnings & increases in the market values, and evaluate market values of stocks relative earnings.
How Earning Per Share is Calculated:
The EPS is also known as the financial ratio that is calculated by dividing the net profit or loss available to the common equity shareholders of the company by the number of ordinary equity shares of common stock outstanding along with a certain time.
Calculation of EPS:
Usually, the EPS formula is used to calculate EPS and it looks like this:
Earning Per Share = Earning / Shares of the company.
If you are not good at manual calculations then you can use Earnings Per Share Calculator for EPS Calculation online utility. As you can see, calculating the share earnings is easy, if a company with 1000 shares earns $10,000 and its EPS is $10 ($10,000 / 1,000). However, the ratio is simple in the principal, lots of complications arise in the practice because of the different definitions & accounting treatments for both earnings and shares.
In the Earning Per Share formula, the numerator represents the net profit, which is distributable to the common equity shareholders and it means earning of a period.
- Less interest & tax.
- Less preference & share dividends are paid in the period.
- Less profit from the non-core extraordinary items & discontinued operations.
- Less profit attributes to the non-controlling investment or interest of the minority.
Remember that, the earning could amount to the loss attributes to the common shareholders.
In the EPS formula, the denominator represents the number of common equity shares outstanding during all periods.
- If we look at the simplest form, the earnings per share calculation uses the number of shares that are placed at the end of the reporting period. However, if the number of shares that are standing out with the changes throughout the period.
- The earning per share calculation generally uses the number of shares outstanding as opposed to the total value of all shares in the issue.
Since the earning per share is the value of earnings per outstanding share of the ordinary stocks, and it is expressed ascent per share to one decimal place. Usually, companies report their earnings per share on a quarterly or annually basis.
Top Five Tips to Calculate Earning Per Shares:
The EPS is known as an important & widely used tool for investors. However, a single absolute value for the company is arbitrary and uses the ratio in isolation that does not tell the whole story of the EPS finance of company strength. Therefore, the earnings per share analysis are truly meaningful, and the ratio must be calculated in the context along with the awareness of its limitations. Below are some of the tips for the EPS calculation.
Using of Earnings Per Share Calculator for EPS Calculation:
One of the simplest & easiest ways to calculate earnings per share of a company is to use the EPS calculator to figure the ratios of EPS. All you have to do is to enter the amount of the net income, dividends, number of shares in the designated fields of the tool. After entering the required information click the calculate EPS button to process the earning per share calculation and get instant results. The best thing about the tool is that you don’t need to register or sign up for a website to access the Earnings per share calculator for EPS calculation. If you are tired of spending money on fake tools then you came to the right place because this amazing tool. doesn’t demand you to pay any subscription fee.
Track the EPS with a period:
Investors have to determine the company earnings per share for more than one accounting period to assess the real earning capability & spot trends of the company, and this is ideal for many years. you need to look for the trends in the growth of earning per share to get a sense of how profitable a company is to estimate its prospects.
- If the EPS is higher then, a more profitable company is considered to be.
- A company is steadily increasing its ratio, which is regarded to be a more reliable investment as compared to the significant fluctuating or even declining earnings of the shares.
Benchmark the EPS Against the Similar Companies:
To calculate EPS, compare it to similar companies with the same industry, an average of the industry, or other relevant benchmarks to know how a company is performing relative to its peers. For instance: in between two companies with the same industry the same numbers of shares and other things are being equal and the high earning per share indicates high profit.
Using EPS in Conjunction with Other Metrics:
Investors should have to use the earning per share figure in conjunction with the rest of the rations & metrics to determine the growth, earning, and stock value of a company.
Compare the EPS to the Share Price:
Considering it as part of P/ E ratios, the earnings per share is used to figure out the value of a company’s share price to its earnings. Figure out whether the stocks of the company are relatively expensive/overvalued or cheap / undervalue.
Evaluate Financial & Non-Financial Factors:
Analyze both the financial & non-financial elements to gain a holistic view of the company.
Earnings Per Share Limitations:
Here are the top limitations for the EPS of a company.
The earnings per share ratio are arbitrary and it is considered to be the best way to evaluate by using the trend analysis, to study the growth rate of the company over time. But there are some factors you need to check:
- Is the EPS growing or declining over some time?
- Rate of growth/ decline.
- Increasing & decreasing rate of growth.
When it comes to the EPS ratio to be considered in between the accounting periods of a company and among various companies, it must be calculated based on consistency. However, earning per share may get conveniently distorted, for instance by:
- Accounting policy differences.
- Change in the capital share throughout the yearly course.
- Merging & acquisitions.
Earnings per share are considered to be an essential measure of profitability from the perspective of the shareholders. However, the profit is the only aspect of the performance of the company. Well, as a result, too much focus on the bottom line of the company is narrow-focused, incomplete, and short-sighted.
The Earning Per Share becomes meaningful when the investors show interest in both historical & future EPS figures for the same company. OR it becomes important when they compare the EPS to the companies with the same industry. Bank of America is an example of the financial services sector. When it comes to its result, the investor should compare the earning of shares with the Bank of America with the other stocks of the financial service field. However, you can say that EPS is important to use in conjunction with other performance measures before making any investment decision.