Understanding EPS

Earning Per Share

EPS stands for earnings per share. It reduces a company’s profits on a per share basis thereby, indicating the profitability of a company. EPS is an important parameter in determining or valuing a company’s share price. It is also used to calculate the price-to-earnings ratio.

Dividing the profits by the number of outstanding shares give you earning per share (EPS) i.e. net profit /number of shares = EPS.

EPS is calculated by dividing the profits by the outstanding shares. The result is the amount of money each share of stock would receive if all the profits were distributed among the outstanding stocks. EPS shows how profitable a company is. A higher EPS indicates higher profits.

A more refined calculation adjusts the numerator and denominator for shares that could be created through options, convertible debt, or warrants.

Earnings per share = (net income – preferred dividends)/ end of period shares outstanding.

Basic EPS vs Diluted EPS

Basic EPS does not factor in the dilutive effect of shares that could be issued by the company by way of items such as stock options, warrants, etc, and hence, could increase the total number of shares outstanding.

To better incorporate the effects of additional shares on the per share earnings, organisations report the diluted EPS, which assumes that all shares, which could be outstanding have been issued.

Diluted EPS = (Net income + convertible preferred dividend + debt interest)/All convertible securities plus common shares.