How To Calculate Earnings Per Share (With Examples)

By Indeed Editorial Team

Updated September 14, 2021 | Published February 25, 2020

Updated September 14, 2021

Published February 25, 2020

One of the most useful measures to evaluate a company's financial strength and stock value is its earnings per share (EPS). In this article, we define earnings per share, how to calculate this metric and how it can help you make better investment decisions.

What are earnings per share?

Earnings per share (EPS) is the portion of a company's net income, that would be earned per share if all profits were paid out to shareholders. EPS tells you a lot about a company, including a company's current and future profitability. EPS is easily calculated from basic financial information you can find online.

Related: How To Calculate EBIT

How to calculate earnings per share (with examples)

There are two ways to calculate EPS: using a basic earnings per share equation, or a weighted earnings per share equation. Here are the steps to calculate both:

  • Steps to calculate basic earnings per share

  • Steps to calculate weighted earnings per share

Steps to calculate basic earnings per share

  1. Determine the company's net income from the previous year.

  2. Determine the number of shares outstanding.

  3. Divide the net income by the number of shares outstanding.

1. Determine the company's net income from the previous year

Using a company's net income or earnings for the primary number is the most basic way to determine EPS. This information is normally found on their website or a financial webpage. Be careful not to mistake quarterly net income for annual.

2. Determine the number of shares outstanding

Shares outstanding is the number of shares a company has on the stock exchange. Financial websites should have this information available for public viewing.

3. Divide the net income by the number of shares outstanding

To determine the basic earnings per share you simply divide the total annual net income of the last year, by the total number of outstanding shares.

Here is an example calculation for basic EPS:

A company's net income from 2019 is 5 billion dollars and they have 1 billion shares outstanding.

Basic earnings per share = (5 billion / 1 billion)

Basic EPS = 5

Steps to calculate weighted earnings per share

Weighted earnings per share is a more accurate calculation of EPS because it considers the dividends, also known as preferred stocks, that a company issues to its shareholders. A dividend is the amount of money a company pays out to its shareholders from its profit, usually on a quarterly basis. Here's how to calculate it:

  1. Determine the company's dividends on preferred stocks.

  2. Subtract the company's dividends from its annual net income.

  3. Divide the difference by the average amount of outstanding shares.

1. Determine the company's dividends on preferred stocks

This information is normally available on a company's website or a financial webpage.

2. Subtract the company's dividends from its annual net income

Because companies pay out these dividends to shareholders during the year, they cannot be included in annual net income.

3. Divide the difference by the average amount of outstanding shares

Just like the basic earnings per share calculation, the number of shares gets subtracted from the annual net income (without the dividends).

Here is an example calculation for weighted EPS:

A company's net income from 2019 is 15 billion dollars, they pay a 2 billion dividend to shareholders over the course of the year, and they have 4 billion shares outstanding.

Weighted earnings per share = (15 billion - 2 billion) / 4 billion

Weighted EPS = 13 billion / 4 billion

Weighted EPS = 3.25

Related: How Analyzing Data Can Improve Decision Making

How to interpret results

EPS carries significance in terms of a company's profitability, performance and value, which is important information for you as an investor. Here's how to interpret EPS results:

  • A higher EPS means a higher payout.

  • Use EPS to compare companies.

  • Use EPS growth trends to forecast future profitability.

  • Use EPS to determine stock value.

A higher EPS means a higher payout

A bigger EPS number means a company is more profitable and able to pay out more money to you as a shareholder. It's important to note, however, that no specific fixed number indicates you should buy shares or sell your shares. It's suggested to always look at a company's EPS compared to similar companies.

Use EPS to compare companies

Comparing the EPS of companies within the same industry will help you make smarter investments by seeing how a company performs relative to others. Also consider other factors when making investment decisions such as:

  • Share price

  • Number of dividends

  • The value of the company traded on the stock market (also known as market capitalization)

  • Liquidity (how easily a company's assets can convert to cash)

Use EPS growth trends to forecast future profitability

A company with a consistently increasing EPS is considered a more reliable investment, than a company with a declining or unpredictable EPS. Analyzing a company on a per-share basis helps you track its performance over time to make informed investment decisions.

Use EPS to determine stock value

The price-earning ratio of a company helps you determine if its stock price is correct. EPS offers the information on earnings needed for the price-earning comparison. By dividing the share price by the earnings per share, you can determine if the company is expensive or fairly-valued compared to similar companies in its industry.

Related: How To Calculate EBITDA

Types of earnings per share

EPS has three types, based on where the numbers come from:

  • Trailing EPS

  • Current EPS

  • Forward EPS

Trailing EPS

Trailing EPS is based on numbers from the previous year. This calculation uses earnings from the four previous quarters to calculate earnings per share. Most stock market values use trailing EPS because it uses actual figures. However, investors may not look much at trailing EPS since it does not project future EPS figures.

Current EPS

Current EPS is based on numbers from the current year, which include projections. This calculation uses figures from the four quarters of the current fiscal year. Some quarters already passed, providing actual figures, while some quarters remain projections.

Forward EPS

Forward EPS is based on the future, projected numbers. Analysts or the company itself often make forward projections for investors, who want to know about the earning potential of the company.

Many investors will compare all three types of EPS to make smarter investment decisions.

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