Earnings Per Share (EPS): Definition And Examples

Before making investment decisions, it’s important to understand what the terms commonly thrown around by analysts and listed on a company’s balance sheet really mean.

In this article, we’ll focus on Earnings Per Share (EPS). We’ll discuss what the term means and how to calculate it, the different types of EPS, and important tips for interpreting and making practical use of it.

What Does Earnings Per Share (EPS) Mean?

A company’s earnings per share (EPS) is the quarterly profit divided by the current number of outstanding shares of common stock.

The figure is one of the many metrics used for determining a company’s profitability and whether its current share price is justified.

Public companies report their earnings per share each quarter to shareholders, often adjusting for potential share dilution and extraordinary items.

How to Calculate a Company’s Earnings Per Share

You can calculate a company’s basic EPS by dividing its net income (also commonly called earnings or profit) by the number of available shares of common stock.

The actual formula for calculating EPS is as follows:

All of this information can be obtained from a public company’s end-of-quarter balance sheet.

As a company’s available shares may change throughout a quarter, you may want to use a weighted average to perform any EPS calculations.

Earnings Per Share Example Calculations

Here are some examples to illustrate how to calculate a company’s basic earnings per share:

• Company A

  Net income: $18.78 billion
  Preferred dividends: $1.23 billion
  Weight common shares: 10.4 billion

  Basic EPS:
  $18.78 – $1.23 / 10.4 = $1.688

• Company B

  Net income: $452 million
  Preferred dividends: $0
  Weighted common shares: 4.7 million

  Basic EPS:
  $452 – $0 / 4.7 = $96.17

• Company C

  Net income: $23 million
  Preferred dividends: $1.7 million
  Weighted common shares: 1.6 million

  Basic EPS:
  $23 – $1.7 / 1.6 = $13.31

Different Types of Earnings Per Share

So far, we’ve only explained and provided example calculations for a company’s basic earnings per share.

However, there are many variations on how EPS is calculated that account for additional factors.

A few examples of these different earnings per share calculations include:

• Forward EPS. Forward EPS is a calculation of a company’s EPS based on earnings projections for a future quarter.

  Companies and analysts will often provide these projections based on an analysis of growth patterns and other relevant factors.

  Although forward EPS is based on estimates, the metric greatly interests most investors since the act of investing in a company is based on expectations about its future earnings potential.

• Trailing EPS. You can calculate a company’s trailing EPS using the basic EPS formula, but with its previous four quarters of earnings (less preferred dividends) as the numerator.

  Trailing EPS is often a useful metric as it represents real earnings figures from the past rather than future estimates.

  However, some investors see it as “old news” and pay more attention to Forward EPS. This is especially common for high-growth companies such as Uber and NetFlix that have grown their earnings tremendously since the previous year.

  Most price-to-earnings (P/E) ratios use trailing EPS in their calculations.

• Pro Forma/ Ongoing EPS. Pro forma EPS excludes earnings based on extraordinary one-time events and only considers ordinary net income.

  The purpose here is to focus only on a company’s core operations and their consistent income streams, as that may provide the best picture of how valuable the company is.

  For example, a company may realize above-average net income in a given quarter after selling off a large division.

  As the sell-off was an atypical event, excluding it from EPS calculations makes the metric more useful for apples-to-apples calculations against other companies and past/future performance.

• Book Value of Equity Per Share (BVPS). Otherwise known as book value or carrying value EPS, BVPS calculates how much company equity each share carries.

  In other words, these metric measures share value as a proportion of the value of the company’s assets if they closed shop and liquidated all of them.

  In some ways, this figure indicates a “price floor” for each share, as it directly represents the value of the raw assets held by the company.

  However, this is just a simplification. Management could poorly manage a company and decrease the value of its assets below BSVP before any eventual liquidation.

• Retained EPS. A company’s retained EPS is their net income plus any currently held retained earnings, less total amount of dividends paid out, divided by the number of outstanding shares.

  The figure is listed as a line item on a balance sheet under stockholders’ equity.

  Companies commonly use retained earnings to pay dividends in the future, expand operations, and pay off debts. They may also simply keep it as a reserve.

• Cash EPS. A company’s cash EPS can be calculated by dividing their operating cash flow by their diluted shares outstanding.

  Unlike net income, which takes into account numerous different expenses and income streams, operating cash flow only measures how much a company generates through normal business operations.

  For this reason, many see a company’s cash EPS as a better indicator of its trajectory and overall health than basic EPS.

  If company A reports a basic EPS of $1 but a cash EPS of only $0.5, then they likely won’t be able to sustain such a high basic EPS quarter after quarter.

  You can typically assume that a company B that reported a basic EPS of $0.5 and a cash EPS of $1.0 is in better shape, as the EPS of $1.0 was generated through normal business operations that should be constant each quarter.

  Of course, this is just a simplified comparison. In reality, there are many other factors that you should consider when comparing companies.

How to Interpret Earnings Per Share

While EPS is certainly a useful metric, it’s not a catch-all tool that you can use to determine a company’s value.

Here are a number of important factors you should consider alongside EPS:

• Capital and expenditure. A company needs to use capital to generate the earnings used in EPS calculations.

  One company may generate the same EPS as another but with less capital and employees hired, making them more efficient.

  This metric also called return in equity (ROE), is important to consider when you’re comparing one company’s earnings per share against another.

• Price-to-earnings and industry averages. When examining whether a company is fairly valued, it can be useful to compare its price-to-earnings (P/E ratio) against other competing members of its industry.

• Dividends. Regardless of a company’s high performance, shareholders don’t actually have a way to directly access those profits other than through dividends.

  In many cases, however, companies will retain the entire EPS and pay no dividends at all. This is commonly the case with technology companies that invest heavily into growing themselves rapidly.

  Some companies even disclose that they have no plans to ever distribute dividends to shareholders.

  In these cases, it can be difficult to draw a direct relationship between a company’s EPS and the value of its shares, as shareholders aren’t directly making money with the company.

  The takeaway here is that although EPS is a pretty decent indicator of a company’s health, you shouldn’t use it as the only determinant of whether the company is fairly valued.

• Earnings beat/miss. A company’s share value often indicates how much investors expect them to grow their earnings in the future rather than their current earnings.

  This is especially the case when there is a general consensus estimate on a company’s forward EPS.

  The flip side of this is that these estimations aren’t always met, and stock prices will often react dramatically depending on the difference.

  If a company’s earnings beat, that may cause the stock price to surge. Conversely, an earning miss may result in the stock price quickly falling.

• Misleading figures. Because of all the factors involved in calculating a company’s net income and therefore its EPS, there are many opportunities for management to inflate or otherwise misrepresent the figures.

  A company may buy back a portion of its outstanding shares one quarter, increasing its EPS even as net income stays the same.

  Of course, this isn’t always or even usually done with intentions to deceive investors. However, it’s definitely a limitation of EPS as a metric that you need to watch out for.

• Shares outstanding. Different EPS calculations may use different classifications to decide how many outstanding shares the company has issued.

  Primary EPS simply takes into account the shares issued to investors and available for trading on the market.

  Diluted EPS, on the other hand, additionally considers shares locked up in convertible bonds, stock options, and exercisable options.

  If those locked-up shares are released onto the market, then that would typically dilute the supply and lower the price of each share.

  Diluted EPS is, therefore, a more conservative metric, as it better represents the possible downside for the value of the stock.

  Balance sheets will clearly label which EPS figure is diluted and which is primary.

  However, you don’t know which type of EPS a CEO is referring to when they quote a number on the news or in an interview, so it’s prudent to stay aware and investigate before making investment decisions.

Author

Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.