Earnings per Share (EPS) is a term commonly used in the financial world. Earnings per Share reflects the share of the company's profits distributed to one share. Therefore, if you multiply EPS by the total number of shares owned by the company, you will be able to calculate the net profit of this company. EPS is a calculation result that is always considered by stock market observers.
Step
Method 1 of 3: Calculating EPS the Simple Way
Step 1. Find the company's net income or net profit figures for the previous year
This information can be found on many financial web pages, or on company websites. Using the company's net income or profit as the main number in this calculation is the simplest way to determine EPS.
- For example, suppose you want to calculate EPS from Microsoft based on the company's net income. Through a quick search, the Microsoft website informs you that during 2012, the company's net profit was close to $17 billion.
- Be careful not to mistake a company's quarterly net profit figures for annual net income. Quarterly profit calculation is done every three months, while annual profit is calculated every 12 months. If quarterly profit is used as annual profit then your EPS calculation result will be four times less.
Step 2. Find out how many shares outstanding
How many shares does the company have on the stock exchange? This information can be obtained by visiting financial websites and searching for company information.
We will continue by using Microsoft's example. At the time of writing, Microsoft has 8.33 billion shares outstanding
Step 3. Divide net income by the number of shares outstanding
Using data from Microsoft as an example, we will divide $17 billion by 8.33 billion and the result is an EPS figure of $2.
Use another example. Let's say a football company bocce makes $4 million in profit and has 575,000 shares outstanding. We divide $4 million by 575,000 and get an EPS figure of $6.95
Method 2 of 3: Calculating Weighted EPS
Step 1. Make a few adjustments in the simple EPS calculation to get a weighted EPS figure
The results of the weighted EPS calculation will be more accurate because the figures used already take into account the dividends paid by the company to shareholders. However, the calculation with this formula will be more complicated when compared to the simple EPS formula, so it is not used very often even though this method of calculation is more accurate.
Step 2. Find the number of dividends distributed by the company for the preferred stock
A dividend is a sum of money paid to shareholders - usually quarterly - out of a company's profits.
In the following example, we will use Apple company data to calculate it. During 2012, Apple announced that it would pay a quarterly dividend of $2.5 billion, starting in the third quarter. Thus, during the year, the total dividend paid by the company was $5 billion
Step 3. Find the net profit of the company and then subtract the dividend for preferred stock
In this example using Apple's corporate data, a quick search shows that Apple's net profit for 2012 was $41.73 billion. Subtract this $5 billion figure from $41.73 billion to come up with a figure of $36.73 billion.
Step 4. Divide this reduction by the number of shares outstanding
Apple's net profit after deducting dividends in 2012 was $36.73 billion. Divide this amount by the number of shares outstanding of 934.82 million, and the result is a weighted EPS of $39.29.
Method 3 of 3: Utilizing EPS Calculation Results
Step 1. Use the results of the EPS calculation as a barometer to measure the profitability of a company
EPS provides clues to investors and potential investors about the profitability of a company. A higher EPS figure generally indicates that this company is in a better condition in generating profits. As with other figures, however, EPS should not be viewed in isolation. It is uncertain if a high EPS number means the stock should be bought, and if a low EPS number means the stock should be sold. A company's EPS figure should be viewed in relation to other companies.
Step 2. Recognize that more than just a calculation, EPS can be the most important factor determining a company's stock price
Knowing the amount of EPS from a company is more useful than knowing the company's profit because EPS will explain the company's ability to generate profits. (A large company generating a net profit of $1 million is not that impressive when compared to a small company that both generates a profit of $1 million.) EPS is also an integral part of evaluating the Price to Earning Ratio, or ratio. P/E.
Step 3. Recognize that the results of the EPS calculation alone are not enough to provide information as a basis for making investment decisions
EPS only shows you how a company is doing compared to other companies, or how this company is doing in its industry as a whole, but it doesn't give any clue as to whether investing in this company is the right decision or whether the value of this company is too high. So that you can make decisions based on correct information in making a decision to invest in shares in a company, at least you must also consider the following things:
- Company stock market price
- Price per share
- Dividend/buyback
- Long term financial plan
- Liquidity capability
Tips
- When making the decision to invest in a company, keep in mind that EPS figures are often calculated using the company's total reported earnings. This term is used widely because it is the easiest way to describe how much a company is capable of generating profits.
- When doing this calculation, pay attention to the number of shares outstanding. The larger the number of shares, the smaller the diluted EPS figure.
- Most of the information you need for this calculation can be found online. In order to get the information you need, all you need to do is visit a company's financial website to look for income statements and other financial reports.
- Be careful if you want to calculate a weighted or simple EPS figure for reporting purposes. In certain situations the numbers are no different but you should still know when you need to use simple EPS calculations to make more general estimates, and when you should use weighted EPS given that these numbers can change over time.
