Earnings per Share (EPS)

Earnings per share are the company’s total earnings or net income divided by its shares outstanding. This is reported either for one quarter or for the entire year. The term Earnings per share (EPS) represents the portion of a company’s earnings, net of taxes and preferred stock dividends that are allocated to each share of common stock. The figure can be simply calculated by dividing net income earned in a given reporting period by the total number of shares outstanding during the same term, because the number of shares can fluctuate.

EPS is found by taking the net income and dividing it by the basic or diluted number of shares outstanding as reported. If you do this for each quarter and then add them up, you’ll get the trailing EPS. This is part of the input in the price to earnings ratio. EPS is one of many things that can be used as a basis for determining an “intrinsic value” for a stock.

Importance of EPS

An important aspect of Earning per share that often ignored is the capital that is required to generate the earnings in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment), that company would be more efficient at using its capital to generate income. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number.

EPS is carefully scrutinized metric that is often used as a barometer to gauge a company’s profitability per unit of shareholder ownership as EPS is a key driver of share prices, also used as the denominator in the frequently cited P/E ratio. It is important not to rely on one financial measure, but to use it in conjunction with statement analysis and other measures.

Uses of EPS

The most common use of Earning per share is to calculate PE ratio, which outs EPS into context by comparing it to the share price. There are number of variants of the PE ratio, using past earnings, forecast earnings or the average over many years. Trends in EPS are also an important measure of growth, when EPS growth is combined with PE in the PEG ratio. It is also used to screen the growth of companies, as it’s a key measure of management performance as it shows how much money the company is making for shareholders, not only because of changes in profits, but also after all the effects of new shares issues.

Questions:

• What are Earnings per Share (EPS)?
• What is the importance of EPS?