EPS or Earnings Per Share is one of the most important financial measures that indicates a company’s profitability. It is a significant variable to determine the share price of a company. It is a financial ratio indicating the amount of profit or loss for the period attributable to each equity share. It is crucial for investors and other people who are involved in the stock market and is frequently used by them to gauge a company’s profitability before buying shares of the company. A high Earning per share indicates that the company is very profitable, and more profit is available for distribution to the shareholders. In short, the higher the Earnings per share, the better the profitability of the company. It can be said that the Earnings per share are a basic yardstick of the profitability of a company that you can use to get an idea of whether the company is safe for the bet.
EPS Calculation: EPS calculation is very simple and easy. Earnings per share are generally calculated on a quarterly or annual basis.
Basic EPS = (Net income – Dividend on Preference Shares) / Outstanding Shares at End-of-period
For example, if a company has 5000 outstanding shares and the profit of the company is ₹50,000, then as per Earning per share formula, the earning per share would be:
₹50,000 / 5,000 = ₹10/share
The EPS is ₹10 / share (assuming nil preference dividend).
The resulting number, i.e., earnings per share of ₹ 10 in our example, can be considered as an indicator of the profitability of a company.
Weighted EPS = (Net income – Dividend on Preference Shares) / Weighted average outstanding shares
For instance, let us take the following data to calculate the weighted earnings per share.
Date of Change | No. of Outstanding shares | Weight | Weighted average share |
1st April 2021 | 4,00,000 | 3/12 = 0.25 | 1,00,000 |
1st July 2021 | 5,00,000 | 6/12 = 0.50 | 2,50,000 |
1st Oct 2021 | 6,00,000 | 3/12 = 0.25 | 1,50,000 |
Total | 5,00,000 |
Hence, the outstanding weighted average share for the given year = 5,00,000 shares.
To calculate the weighted earnings per share, we will divide the net income of the company by 5,00,000 shares, i.e., outstanding weighted average shares.
Diluted EPS = (Profit/ loss attributable to ordinary equity shareholders when dilutive potential shares are converted into ordinary shares)/(Weighted average number of equity shares + Weighted average number of dilutive potential ordinary shares)
Once you have collected the necessary data, enter the net income, preference dividends, and the number of outstanding common shares into the three adjacent cells, say A3, A4, and A5. Now, in cell A6, input the following formula “=A3-A4” to subtract preference dividends from the net income. After that, in cell A7, input the following formula “=A6/A5” to get the EPS ratio.
The calculation of earnings per share is quite simple. But there are different variations of earnings per share that are in use these days. Each variation tends to represent a different side of EPS. From retained earnings per share to GAAP earnings per share, you need to understand what these represent to make an informed decision about shares.
Because of these variations of earning per share, a share may appear overvalued or undervalued. Let us now understand the different varieties of earnings per share and what each variety represents about the performance of the company.
Normally, there are three broad categories in which earnings per share is divided:
Generally, Retained earnings per share are declared under the head- stockholders equity in the balance sheet.To compute the retained earnings per share, we have to add the net earnings and the net current earnings which were retained and then subtract the total amount of dividend distributed from it. Lastly, divide the remaining amount by the number of total outstanding equity shares.
Therefore, you can compute the retained EPS calculations using the below formula –
Retained EPS = ((Net earnings + net current retained earnings) – dividend distributed) / Total number of outstanding equity shares
On the other hand, if the amount of retained earnings is negative, subtract it from the net earnings of the subsequent accounting period.
For ease of your understanding, Cash EPS can be described asCash EPS = Operating Cash Flow / Total number of diluted shares outstanding
Understanding the overall EPS variations: Let us understand the above-mentioned variations of Earnings Per Share with the help of a table –
EPS Variations | Calculations |
GAAP EPS or Reported EPS | It is computed as per GAAP (Generally Accepted Accounting Principles). |
Pro Forma EPS or Ongoing EPS | It excludes an abnormal one-time profit in the net income. |
Retained EPS | It is then computed by dividing the amount of net earnings and current retained earnings after subtracting the dividend paid from the total number of outstanding shares. |
Cash EPS | For computing Cash EPS, total operating cash is divided by outstanding diluted shares. |
Book Value EPS | For computing the EPS, take the current balance sheet into account. |
To measure the profitability & financial standing of a company, the points mentioned below highlight the importance/ need of earnings per share –
When you look at the Earnings Per Share to make an investment or to make a trading decision, be aware of some of the possible drawbacks. For instance, a company can handle its Earnings Per Share by buying back its stock, thereby reducing the number of outstanding shares, and as a result, inflating the EPS amount given the same amount of earnings. EPS can also change due to changes in the accounting policy for reporting the earnings. Also, EPS has little to say about whether the stock of a company is under or overvalued because EPS does not take into account the price of the share.
Although EPS is believed to be one of the potent financial tools, you must keep in mind that earning per share has its drawbacks also.
The below list highlights some of the limitations of EPS which you must remember :–
Hence, before you judge a company’s merit as an investment choice, you should also verify other crucial factors. In fact, to gain a good idea of the overall scope, market performance & profitability of a business venture, you should align EPS with the other financial parameters.
The non-diluted earnings per share can be computed by using the following formula:
Non-diluted EPS = Net Income/Total current Shares Outstanding
The diluted earnings per share can be computed by using the below formula:
Diluted EPS = Net Income/ Total current Shares Outstanding + Exercisable Rights on New Shares
The calculation of EPS components are as follows–
i) Net Income
ii) Current Shares Outstanding
iii) Exercisable Rights on New Shares
Following are the types of EPS:
i) GAAP EPS or Reported EPS
ii) Ongoing / Pro Forma EPS
iii) Book Value EPS / Carrying Value EPS
iv) Retained EPS
v) Cash EPS
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Open Demat Account &
Trade @ Rs15 per order.
“Filing of complaints on SCORES – Easy & quick”
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.