Earnings Per Share (EPS) is the amount of money that a company allocates to each outstanding share of a common stock.
Put simply, a company’s EPS is its profit, minus dividends, divided by the total number of common outstanding shares. If the firm earned $4 million in one year (after paying out dividends) and had 4 million common shares of stock outstanding, then its EPS should be $1 per share.
EPS must not be confused with the term ‘earnings’ on its own, which means ‘profits’.
In the US the Financial Accounting Standards Board (FASB) requires companies to disclose information on EPS for continuing operations, discontinued operations, extraordinary items, and net income.
Earnings per share is one of the main indicators of how profitable a company is.
Preferred stock rights have priority over common stock. Therefore, before calculating the EPS dividends declared on preferred shares are subtracted.
It is the single most important variable in calculating the price of a share. It is also used to calculate the price-to-earnings valuation ratio.
Diluted EPS includes the shares of warrants or convertibles outstanding in the outstanding shares number.
According to ft.com/lexicon, Earnings Per Share means:
“Profit, net of tax and dividends to preferred shareholders, divided by the total amount of ordinary shares outstanding. In the US, companies report basic earnings per share (which does not include stock options, warrants and convertibles), and fully diluted earnings per share (which does).”
How to calculate earnings per share:
Earnings per share (basic formula):
(Profit – Preferred Dividends) / (Weighted Average Common Shares)
Earnings per share (net income formula):
(Net Income – Preferred Dividends) / (Average Common Shares)
Earnings per share (continuing operations formula):
(Income From Continuing Operations – Preferred Dividends) / (Weighted Average Common Shares)
Example of calculating earnings per share:
Assume that a corporation has a net income of $10 million. If that company pays out $2 million in preferred dividends and has 5 million shares for half of the year and 6 million shares for the other half, the EPS would be $1.45 (8/5.5).
Video – Earnings Per Share explained