Earnings Per Share (EPS) is one of the most significant financial metrics that’s utilized to evaluate a company’s profitability on a per-share basis. This makes investors aware of how much money a company makes for each share of its stock.
Plus, they feel more empowered to evaluate the overall company’s performance and make investment decisions accordingly. To help investors—including you—get the best value for their money invested, we’re going to shed light on how to calculate EPS.
- Check Out the Crucial Components of EPS
First of all, empower yourself by knowing and understanding the significant components of EPS, including;
Net Income – It refers to the company’s overall earnings after deducting all expenses, taxes, and costs. The details of net income can be found on the income statements.
Preferred Dividends – Suppose the company has issued preferred shares. In that case, any dividends owed to these shareholders are supposed to be deducted from net income before you calculate EPS.
- Basic EPS Calculation
Here’s the formula for calculating basic EPS;
Basic EPS = {Net Income} – {Preferred Dividends}/{Weighted Average Shares Outstanding}
Note: Weighted Average Shares Outstanding shows the average number of shares that were outstanding during the reporting periods. Its primary purpose is to account for any stock splits or buybacks during that time.
Consider choosing a reliable calculator from a trusted platform like SoFi for calculating earnings per share and deriving accurate results.
- Diluted EPS Calculation
If all convertible securities – like options and convertible bonds, were exercised, Diluted EPS considers the potential dilution of shares that could occur. Look at the formula to calculate the diluted EPS.
Diluted EPS = {net income – preferred dividends} / {weighted average number of shares outstanding + the conversion of any in-the-money options, warrants, and other dilutive securities}
Note: Adjustments for Convertible Securities entail prospective rises in net income and shares outstanding. This could result from the conversions of options, warrants, or any other dilutive securities.
- Analyzing the Results
Once the EPS calculation is carefully completed, it’s time to analyze the outcomes in terms of previous performance and industry standards. Just be sure that a higher EPS signifies higher profitability.
However, it’s strongly advised to keep tabs on trends changing over time. Don’t stop there! Remember to compare them with competitors to evaluate the achieved results.
- Necessary Points of Consideration
Here’s a breakdown of some essential points you must consider;
- As an investor, you must know that EPS is just one aspect of a company’s financial position. To be on the safe side, consider other metrics – like Price to Earnings (P/E) ratio, return on equity, and debt levels.
- Familiarize yourself with any accounting adjustments that could influence EPS figures. Also, be mindful that different accounting policies may affect the reported earnings.
Wrapping It Up
The overall EPS calculation process requires a proper understanding of key financial components and formulas to derive both basic and diluted EPS.
Most financial and accounting experts advise investors to use this metric to determine a company’s profitability and make sound investment decisions.
