How to Calculate Earnings Per Share
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Earnings Per Share Formula
Earnings per share, or EPS, is a ratio that divides a company’s earnings by the number of shares outstanding to evaluate profitability and gain a pulse of the company’s financial health. In its most basic form, it is calculated as:
- EPS = (Net Income) / (Common Stock Outstanding
There are three EPS calculations:
- Trailing EPS uses historical earnings, typically from the previous four quarters in its calculation.
- Current EPS typically uses earnings from the four quarters of the current fiscal year, some of which may have passed, and some of which is in the future.
- Forward EPS typically uses projections of earnings, often for the coming four quarters.
Adjustments to Net Income
1. Extraordinary Items
Because some large, one-off purchases or revenues are unlikely to happen again, such as the sale of a warehouse or payment on a lawsuit, “extraordinary items” are often removed from the net income calculation.
2. Discontinued Operations
Similarly, since the profits from discontinued operations (businesses of a company that will no longer be operating) will not be earned in the future, they may be removed when calculating net income.
3. Preferred Stock Dividends
While preferred dividends are not typically deducted from net income, they typically are when calculating earnings per share.
This is because, like debt, they are an obligation required to be paid before the common stockholders receive dividends.
Adjustments to Common Stock Outstanding
1. Weighted Average Shares Outstanding
Common Stock Outstanding is all stock outstanding on the day of calculation.
This number changes often, so investors sometimes use the weighted average of the shares outstanding to determine the EPS for a specific time period.
When calculating the quarterly EPS for a company, using the weighted average shares outstanding for the time period may give you a better picture than the shares outstanding on the last day of the quarter.
2. Share Dilution
Companies may issue stock or individuals may exercise options at any time, so some investors instead calculate a diluted earnings per share, which calculates a “worst case scenario” earnings per share figure if all of its convertible securities were exercised.
How to Calculate Earnings Per Share FAQ's
EPS stands for earnings per share, which is the amount of a company’s net earnings per share of outstanding stock.
Earnings per share, or EPS, is a ratio that divides a company’s earnings by the number of shares outstanding to evaluate profitability and gain a pulse of the company’s financial health.
In its most basic form, it is calculated as: EPS = (Net Income) / (Common Stock Outstanding