Earnings Per Share (EPS) Calculator
Understanding Earnings Per Share (EPS)
Earnings Per Share (EPS) is one of the most important metrics used by investors and analysts to determine a company's profitability. It represents the portion of a company's profit allocated to each individual share of common stock.
The EPS Formula
The standard formula for calculating Basic EPS is:
EPS = (Net Income – Preferred Dividends) / Weighted Average Common Shares Outstanding
- Net Income: The total profit of the company after all expenses, taxes, and interest have been paid.
- Preferred Dividends: These must be subtracted from net income because they are paid out before common shareholders have a claim to earnings.
- Weighted Average Common Shares: This accounts for changes in the number of shares outstanding over a specific reporting period (e.g., if a company buys back shares or issues new ones mid-year).
Practical Example
Suppose "TechCorp" has a Net Income of $1,000,000. They paid out $100,000 in Preferred Dividends. Throughout the year, they had an average of 500,000 shares outstanding.
Calculation: ($1,000,000 – $100,000) / 500,000 = $1.80 EPS.
This means for every share you own, the company generated $1.80 in profit.
Why EPS Matters
EPS is the foundation for the Price-to-Earnings (P/E) ratio, which is used to value a company's stock price relative to its earnings. A consistently growing EPS often signals that a company is becoming more profitable or is efficiently using its capital to buy back shares, thereby increasing the value for remaining shareholders.
Types of EPS
While this calculator focuses on Basic EPS, you may also encounter Diluted EPS. Diluted EPS accounts for all potential shares that could be created from convertible bonds, stock options, and warrants. If a company has many "convertible" securities, the Diluted EPS will be lower than the Basic EPS.