Earnings Per Share (EPS) Calculator
What is Earnings Per Share (EPS)?
Earnings Per Share (EPS) is one of the most important financial metrics used by investors to gauge the profitability of a company. It represents the portion of a company's profit allocated to each individual outstanding share of common stock. Essentially, it tells you how much money a company makes for every share owned by the public.
The EPS Formula
To calculate basic EPS, you must subtract preferred dividends from the net income and divide that figure by the weighted average of common shares outstanding during the period.
Key Components Explained
- Net Income: The total profit of the company after all expenses, taxes, and interest have been paid.
- Preferred Dividends: These are dividends that must be paid to preferred shareholders before common shareholders receive anything. They are subtracted because EPS specifically measures value for common shareholders.
- Average Outstanding Shares: This is the mean number of shares held by all stockholders during the reporting period. Companies often buy back or issue new shares, so using a weighted average is more accurate than a simple end-of-year count.
Practical Example
Imagine "TechCorp" reported a Net Income of $1,000,000 for the year. They paid $100,000 in dividends to preferred shareholders. Throughout the year, they had an average of 200,000 shares of common stock outstanding.
Calculation: ($1,000,000 – $100,000) / 200,000 = $900,000 / 200,000 = $4.50 per share.
Why EPS Matters to You
A higher EPS generally indicates better profitability and often leads to an increase in the stock price over time. Investors use EPS to calculate the Price-to-Earnings (P/E) ratio, which helps determine if a stock is overvalued or undervalued compared to its peers. However, it is important to look at EPS growth trends rather than just a single snapshot, as companies can sometimes manipulate EPS through share buybacks.