What is EPS?
Investors most often rely on a company’s earnings per share for indicators about that company’s profitability and how much its stock is actually worth.
It’s Not ESP, it’s EPS
You don’t have to hope for a psychic connection to determine a company’s earnings per share, or EPS. The formula is basic:
Profit minus dividends divided by the number of shares outstanding equals EPS.
Profit is simply what a company has left over for its shareholders after all expenses have been paid. Subtract from that the dividends the company is paying and divide that by the numbers of shares that are owned.
That’s what is called Basic EPS. There’s another formula that figures out something called Diluted EPS.
The difference between the two is that the Diluted number also takes into account shares that will be or might be sold in the future.
Why Watch the EPS?
The EPS breaks a company’s profitability down into a number that can be used to make comparisons. Because companies have different numbers of shares outstanding, EPS levels the field.
Say you’re watching two companies and are considering investing in one. The Green Widget Making Company happily announces it has made a $1000 profit for the year. The Purple Widget Making Company follows that with a similar announcement that it has also made $1000 profit for the year.
So how would you know which color widgets to invest in? Break it down to the EPS.
The folks at Green Widget have 100 shares of stock outstanding. Divide the $1,000 profit by 100 shares and you get an EPS of $10 per share.
Over at Purple Widget there are 500 shares of stock outstanding. Divide their $1,000 by 500 shares and you end up with an EPS of $2 per share.
In this instance the Green Widget shares are worth more because the company is earning more money for each share of stock.
Where Do I Find the EPS?
Publicly-traded companies are required to report EPS on the income statement to comply with GAAP, generally accepted accounting principles.
Privately-owned companies do not report an EPS because those shares aren’t traded on the open market.
The EPS can be the result of a quarterly or an annual calculation.
Variations on the EPS
There are three different types of EPS calculations.
- Trailing EPS is computed using last year’s numbers.
- Current EPS is figured with the current year’s numbers and projections for the rest of the year.
- Forward EPS is based completely on projections of future numbers.
Only the Trailing EPS is an actual calculation because Current and Forward EPS numbers rely on some estimates.
Why Measure Earnings?
When it comes down to it, businesses need to make money to survive. The EPS can help you track a company over a period of time to see if earnings have been headed in the right direction. If the EPS has been rising, the company is growing and becoming more profitable.
Crunching the Numbers
The EPS that’s reported on a company’s income sheet may not be completely transparent. Revenue and expenses can sometimes be manipulated to create more favorable numbers when necessary.
A one-time only event, such as a big tax break from the government, can also boost the earnings and the EPS of a company temporarily.
And sometimes you have to do your research to discover if the EPS on the income sheet was calculated as Trailing, Current or Forward to get the most accurate snapshot.
Many investment experts consider EPS the most important factor in determining a company’s profitability. Understanding how it is calculated makes it meaningful for you to use while comparing the financial health of different companies. The research tools here at WallStreetSurvivor.com give you information about a company’s earnings per share and more, so that you can do the research and make the best choices for your own portfolio.