| EPS See earnings per share. |
Earnings per share = (Net income - Preferred dividends) / Average shares outstanding.
Earnings per share (EPS). Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares.
For example, if a company earns $100 million in a year and has 50 million outstanding shares, the earnings per share are $2.
Earnings per share can also be calculated on a fully diluted basis, by adding outstanding stock options, rights, and warrants to the outstanding shares.
The results report what EPS would be if all of those options, rights, and warrants were exercised and the company had to issue more shares to meet its obligations.
Earnings and other financial measures are provided on a per share basis to make it easier for you to analyze the information and compare the results to those of other investments.
What Does Earnings per Share (EPS) Mean?
The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. It is calculated as follows:
In the EPS calculation, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
Investopedia explains Earnings per Share (EPS)
Earnings per share generally is considered the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS will be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, and then a weighted average is taken to find the number of shares outstanding (0.5 × 10M + 0.5 × 15M = 12.5M). An important component of EPS that often is ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS, but the one that could do so with less equity (investment) would be more efficient at using its capital to generate income and, all other things equal, would be a “better” company. Investors also need to be aware of earnings manipulation that may distort EPS. Therefore, do not rely on any one financial measure; use statement analysis and other measures as well.
Related Terms:
• Diluted Earnings per Share—Diluted EPS
• Earnings
• Outstanding Shares
• Price-Earnings Ratio—P/E Ratio
• Weighted Average
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