Calculate Earnings Per Share

Earnings per share (EPS) is a commonly used phrase in the financial world. Earnings per share represents a portion of a company's profit that is allocated to one share of stock. Therefore, if you were to multiply the EPS by the total number of shares a company has, you'd calculate the company's net income. EPS is a calculation that many people who watch the stock market pay attention to.

Steps

Basic Earnings Per Share Calculation

  1. Locate the company's net earning or net income from the previous year. This information can be found on most financial webpages, or on the company's website. Using the company's net earnings or income as the primary number in the calculation is the most basic way of determining EPS.
    • For example, say you want to calculate the EPS of Microsoft based on its net income. A quick browse of Microsoft's website tells you that in 2012, the company's net income was almost $17 billion.[1]
    • Be careful not to mistake a company's quarterly net income with their annual net income. Quarterly profit is calculated every three months, whereas annual profit is calculated every 12 months. Mistaking a company's quarterly net income for their annual net income will cause your calculation to be roughly four times smaller.
  2. Figure out how many shares are outstanding. How many total shares does a company have on the stock exchange? This information can be collected by visiting a financial website and locating the company's information.
    • Again, let's continue with the example of Microsoft. As of the time of writing, Microsoft has 8.33 billion shares outstanding.[2]
  3. Divide the net income by the number of shares outstanding. Taking Microsoft's vitals as our example, we'd divide $17 billion by 8.33 billion and come away with a basic EPS of 2.[3]
    • Take another basic example. Let's say a bocce ball company has a net income of $4 million and 575,000 shares outstanding. We divide $4 million by 575,000 and come up with an EPS of 6.95.

Weighted Earnings Per Share Calculation

  1. Modify the basic EPS calculation slightly to arrive at the weighted earning per share calculation. Weighted EPS is a more accurate calculation because it takes into account any dividends that the company issues to shareholders. However, this formula is more complex than the basic earnings per share calculation or the reporting term, so it is not used quite as often even though it is more accurate.
  2. Locate the company's dividends on preferred stocks. A dividend is an amount of money paid out to stockholders — often quarterly — from the company's profit.
    • For the sake of example, let's take Apple as the company we're trying to arrive at a calculation for. In 2012, Apple announced that it would pay a $2.5 billion dividend quarterly, starting in Q3.[4] That amounts to roughly $5 billion in dividends over the course of the year.
  3. Take the company's net income and subtract the dividends on preferred stock number. Using Apple as an example, a quick search reveals that in 2012, Apple recorded $41.73 billion in net income.[5] Subtract $5 billion from 41.73 to arrive at $36.73 billion.
  4. Divide the difference by the average number of outstanding shares. Apple's net income minus their dividend in 2012 was $36.73 billion. Divide this amount by the amount of shares outstanding, 934.82 million, to arrive at a weighted EPS of roughly 39.29.

Using Earnings Per Share

  1. Use EPS as a barometer for a company's profitability. EPS clues investors and potential investors in to a company's profitability.[6] A higher EPS generally signals a more robust company, profit-wise. Like most numbers, however, EPS should not be looked at in isolation. There's no fixed EPS number above which a company's stock should be bought and below which its stock should be sold. It's important to look at a company's EPS in relation to other companies.
  2. Know that more than other calculations, EPS is probably the single most important factor in driving a company's stock price.[7] Looking at a company's EPS is more valuable than looking at their profit because EPS puts a company's profit into perspective. (A huge company generating $1M net income isn't very impressive; a tiny company generating $1M net income is.) EPS is also integral in evaluating a company's Price to Earnings ratio, or P/E.
  3. Know that calculating EPS is not enough to make an informed decision about whether to invest. EPS will tell you how one company is doing compared to another, or how one company is doing in relation to the industry as a whole, but it won't tell you at a glance whether it's a steal to invest in a company or whether that company is overvalued. In order to make an informed decision about whether to invest in a company's stock, you'll also need to consider the following, at the very least:



Tips

  • When determining whether or not to invest in a company, EPS is often used in place of the total earnings reported by the company. This term is so widely used because it is an easier way to represent how profitable a company truly is.
  • When performing these calculations, make note of the number of shares outstanding. The more shares involved, the more diluted the earnings per share results will be.
  • Nearly all of the information you need to perform these calculations can be found online. To find this information you will need to visit a finance site and look up the company's income statement and other statements.
  • Be aware if you are calculating the weighted EPS number, or the reporting number. In some situations the numbers barely differ but it is still important to know whether you are using the basic calculation for a more general estimate, or the weighted calculation that takes into account that numbers change over time.[7]

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Sources and Citations

  1. ↑ http://www.microsoft.com/investor/EarningsAndFinancials/Financials/FY12/Q1/IncomeStatements.aspx
  2. ↑ http://finance.yahoo.com/q/ks?s=msft+Key+Statistics
  3. ↑ http://www.microsoft.com/investor/reports/ar12/financial-review/notes/earnings-per-share/index.html
  4. ↑ http://appleinsider.com/articles/12/07/24/apple_announces_shareholder_dividend_payout_to_occur_august_16_2012
  5. ↑ http://www.marketwatch.com/investing/stock/aapl/financials
  6. ↑ http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/earnings-share-eps-1003
  7. ↑ 7.0 7.1 http://www.investopedia.com/terms/e/eps.asp
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