How to calculate Earnings per Share or EPS

Earnings per share or EPS is a very commonly used phrase in the financial world. You can find this term in any financial website or company’s annual report or stock analysis report.

Earnings per share or EPS is also known as net income per share. It measures the amount of net income or profit earned per share of stock outstanding. In other words, EPS represents a portion of a company’s profit that is allocated to one share of stock.

eps or earnings per share

This means, each outstanding share will receive that much amount if all the profits were distributed among outstanding shares at the end of the year or period.

For instance, assume that company X and Y earns 1, 00,000 rupees but company X has 1, 000 shares outstanding, while company Y has 500 shares outstanding. In this case shareholders of company Y will me benefited more in comparison to company X as per share earnings will be more.

For this reason it’s always a good idea to look for earnings per share or EPS. As per general practice EPS or earnings per share is calculated by taking net earnings and divide by the outstanding shares.

EPS = Company’s Net Earning/Number of Outstanding Shares

If the company has decided to pay dividend then net earnings should be taken by subtracting preferred dividends. Dividend is an amount of money paid out to stockholders by the company during the year from company’s profit. The reason for this subtraction is to measure the income available to common stockholders.

Many times you will find weighted average common shares used in the EPS calculation. This happen as companies often issue new stocks or buy back their own stock throughout the year. Weighted average common shares can be calculated by adding the beginning and ending outstanding shares and dividing by two.

When calculating EPS, it will be more accurate if weighted average number of shares outstanding is used in the denominator, because the number of shares outstanding can change over time.

EPS = (Net Income – Dividends on Preferred Stock)/ weighted average Outstanding Shares

Example

Assume that company Z has a net income of 25, 000 rupees. If the company has paid 1, 000 in dividends and has 10, 000 shares for half of the year and 15, 000 shares of the other half, EPS would be calculated as follows;

EPS = (25, 000 – 1,000)/ {(10,000+15,000)/2} = 24,000/12500 = 1.92

In the above calculated we have deducted 1,000 dividends from the net income of 25,000 to get 24, 000 for EPS calculation. For weighted average outstanding shares we have added 10, 000 and 15,000 which is then divided by 2 to get 12500.

Also Read: What is diluted earnings per share

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