Earnings per Share Calculator

This simple online tool calculates earnings per share (EPS), a popular metric of a company's profitability. EPS calculation gives valuable insights into the business condition and is a base for more in-depth analysis of potential investments.

This article will teach you what earnings per share is, how it can be calculated, and real-life applications of this gauge. In the end, we will point out some limitations of EPS to give you a good understanding of how to interpret its value correctly.

What are Earnings per Share?

Earnings per Share is defined as a company's net profit divided by the outstanding shares of its common stock. The value of this metric represents the company's profitability.

• EPS shows how much profit a company generates for each stock.
• The higher the EPS value, the more profitable a company is.
• Earnings per Share allows for comparing a company's performance against its competitors or industry benchmarks.
• EPS takes into account only common stocks and ignores preferred stocks.

How to calculate earnings per share?

There are two methods of calculating the EPS value, Basic EPS and Diluted EPS.

Basic EPS considers only outstanding common shares, while Diluted EPS considers the number of shares the company could issue due to existing stock options, warrants, and restricted stock units.

You can find all the values needed to calculate earnings per share on the company's balance sheet and income statement. 

The easiest way to calculate earnings per share is to use our EPS calculator. Alternatively, you can calculate its value using the EPS formula presented below.

The Earnings per Share Formula

The Basic EPS formula is presented below:

EPS = (net_income – dividends_on_preferred_stock) / outstanding_common_shares

Where:

• net_income - Total revenue minus company's costs.
• dividends_on_preferred_stock - Dividend payments to the holders of preferred stocks.
•  outstanding_common_shares - The number of emitted common shares. Since the number of shared may vary over time, it is a good practice to use the weighted average number of common shares. You could simplify the calculation by using the number of shares outstanding at the end of a period.

What is a good EPS value?

Good EPS should surely have a positive value since negative EPS means that the company generated a loss. An EPS value could be considered good if it is higher than industry benchmarks.

Alternatively, you can analyze EPS changes over time. Growing EPS value is a good sign. However, you should remember that if a company buys back its stocks, it could decrease the number of shares outstanding and artificially increase the value of EPS.

Real-life applications of EPS metric

However, EPS is a standalone financial metric that reveals company earnings information. It is also a base for much more advanced analysis.

EPS is a crucial component for Price to Earnings calculation.

Earnings per Share Growth (EPS growth) is a popular method for finding investment opportunities. 

EPS is a part of a popular method of company valuation called discounted cash flow.

Limitations of EPS indicator

In order to drive the proper conclusion from EPS analysis, you should understand the limitations of this metric.

Changes in internal company's policy may affect the EPS

As we mentioned before, the company can undertake actions that affect the value of EPS. For example, the company can decrease the number of shares outstanding by buying back its stocks.

The lower number of shares outstanding means a lower denominator in the EPS formula, which increases its value while net profit stays the same.

Changes in accounting policy that influence profit reporting may also impact EPS value. 

EPS does not take into account the share price

While EPS gives you information about the company's profitability, since it does not consider the stock price, it doesn't tell you if the company is a good investment at the moment. 

You should perform a more in-depth analysis before identifying good investment opportunities.

EPS ignores the capital required to generate profits

Another significant drawback of EPS analysis is that it does not analyze the amount of capital needed to create profits. So it would help if you extended EPS analysis by calculating the return on equity or return on capital employed to get a better overview of the company's performance.

EPS does not reflect the value of paid dividends

Finally, earnings per share do not tell you how much dividend the company will pay. It is up to the company's management to decide how much profits will be distributed as dividends and how much will be retained for future investments.

Similar metrics

EPS is one of many profitability metrics, all of which you can calculate using Calcopolis. The most popular are gross profit margin, EBIT, EBITDA, ROA, ROCE, and ROE. Each of them analyzes a company's performance from a slightly different angle. 

Authors

Created by Lucas Krysiak on 2022-10-18 17:38:26 | Last review by Mike Kozminsky on 2022-10-19 19:16:40