Earnings Per Share (EPS) is a fundamental financial metric used by investors to assess a company's profitability. It represents the portion of a company's profit allocated to each outstanding share of common stock. A higher EPS generally indicates greater profitability and a more valuable investment.
EPS is calculated using a company's net income and the number of its outstanding shares. It's one of the most widely used ratios in the stock valuation process.
The Formula Explained
There are two main types of EPS: Basic EPS and Diluted EPS. This calculator focuses on Basic EPS, which is calculated as follows:
Basic EPS = (Net Income – Preferred Dividends) / Weighted Average Number of Outstanding Common Shares
Net Income: This is the company's total profit after all expenses, taxes, and interest have been paid. It can be found on the company's income statement.
($) (Note: Inputted as a numerical value representing currency).
Preferred Dividends: These are dividends paid to holders of preferred stock. Since preferred stockholders have a higher claim on assets than common stockholders, their dividends are subtracted from net income to determine the earnings available to common stockholders. If a company has no preferred stock, this value is $0.
($) (Note: Inputted as a numerical value representing currency).
Weighted Average Number of Outstanding Common Shares: This figure represents the average number of common shares outstanding over a specific period (usually a fiscal quarter or year). Using a weighted average accounts for changes in the number of shares due to stock issuances or buybacks throughout the period. It's crucial because the number of shares can fluctuate, impacting EPS.
(Shares) (Note: Inputted as a numerical value representing shares).
Why is EPS Important?
EPS serves as a key indicator for several reasons:
Profitability Gauge: It directly measures how much profit a company generates for its shareholders.
Trend Analysis: Tracking EPS over time can reveal a company's growth trajectory and operational efficiency.
Comparison Tool: Investors use EPS to compare the profitability of different companies within the same industry.
Valuation: EPS is a critical component in many valuation multiples, such as the Price-to-Earnings (P/E) ratio.
While EPS is a valuable metric, it should always be considered alongside other financial data and qualitative factors when making investment decisions.
Example Calculation:
Let's consider a hypothetical company:
Net Income: $10,000,000
Preferred Dividends: $500,000
Weighted Average Shares Outstanding: 2,000,000 shares
This means the company earned $4.75 for each outstanding share of common stock during that period.
function calculateEPS() {
var netIncomeInput = document.getElementById("netIncome");
var preferredDividendsInput = document.getElementById("preferredDividends");
var weightedSharesOutstandingInput = document.getElementById("weightedSharesOutstanding");
var epsResultSpan = document.getElementById("epsResult");
var errorMessageDiv = document.getElementById("errorMessage");
// Clear previous error messages
errorMessageDiv.textContent = "";
// Get input values
var netIncome = parseFloat(netIncomeInput.value);
var preferredDividends = parseFloat(preferredDividendsInput.value);
var weightedSharesOutstanding = parseFloat(weightedSharesOutstandingInput.value);
// Validate inputs
if (isNaN(netIncome) || netIncome < 0) {
errorMessageDiv.textContent = "Please enter a valid number for Net Income.";
epsResultSpan.textContent = "–";
return;
}
if (isNaN(preferredDividends) || preferredDividends < 0) {
errorMessageDiv.textContent = "Please enter a valid number for Preferred Dividends.";
epsResultSpan.textContent = "–";
return;
}
if (isNaN(weightedSharesOutstanding) || weightedSharesOutstanding <= 0) {
errorMessageDiv.textContent = "Please enter a valid number greater than zero for Weighted Average Shares Outstanding.";
epsResultSpan.textContent = "–";
return;
}
// Calculate EPS
var earningsAvailableToCommon = netIncome – preferredDividends;
var eps = earningsAvailableToCommon / weightedSharesOutstanding;
// Display the result, formatted to two decimal places
epsResultSpan.textContent = "$" + eps.toFixed(2);
}
function resetForm() {
document.getElementById("netIncome").value = "";
document.getElementById("preferredDividends").value = "";
document.getElementById("weightedSharesOutstanding").value = "";
document.getElementById("epsResult").textContent = "–";
document.getElementById("errorMessage").textContent = "";
}