Earnings Per Share (EPS) is a key financial metric used to determine a company's profitability on a per-share basis. It indicates how much profit a company makes for each share of its common stock. Investors use EPS as a primary indicator of a company's financial health and to calculate the Price-to-Earnings (P/E) ratio.
EPS = (Net Income – Preferred Dividends) / Average Outstanding Shares
Understanding the Inputs
Net Income: The total profit of the company after all expenses, taxes, and interest have been paid.
Preferred Dividends: Dividends promised to preferred shareholders. These must be subtracted from net income because EPS measures earnings available specifically to common shareholders.
Average Outstanding Shares: The weighted average number of common shares held by stockholders during the reporting period.
Real-World Example
Suppose "TechCorp" reports a net income of $1,200,000. They paid $200,000 in dividends to preferred shareholders. Throughout the year, they had an average of 500,000 common shares outstanding.
Using the formula:
Earnings Available = $1,200,000 – $200,000 = $1,000,000
EPS = $1,000,000 / 500,000 = $2.00 per share.
Why EPS Matters
A higher EPS generally suggests higher profitability and may lead to an increase in the stock price. However, it is important to compare EPS figures within the same industry and consider the company's historical performance, as share buybacks can artificially inflate EPS by reducing the number of outstanding shares.
function calculateEPS() {
var netIncome = parseFloat(document.getElementById('netIncome').value);
var prefDividends = parseFloat(document.getElementById('prefDividends').value);
var avgShares = parseFloat(document.getElementById('avgShares').value);
var resultArea = document.getElementById('resultArea');
var epsOutput = document.getElementById('epsOutput');
var resultText = document.getElementById('resultText');
if (isNaN(netIncome) || isNaN(prefDividends) || isNaN(avgShares)) {
alert("Please enter valid numeric values for all fields.");
return;
}
if (avgShares <= 0) {
alert("Average outstanding shares must be greater than zero.");
return;
}
var earningsAvailable = netIncome – prefDividends;
var eps = earningsAvailable / avgShares;
epsOutput.innerHTML = "$" + eps.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
resultText.innerHTML = "This means for every share of common stock, the company generated " +
"$" + eps.toFixed(2) + " in net profit after meeting preferred obligations.";
resultArea.style.display = "block";
}