Earnings per Share (EPS)
The financial ratio earnings per share, or EPS, is perhaps the single most popular variable used by analysts and investors to evaluate the profitability of a company. EPS measures the profitability of a company on a per share basis.
Earnings per Share = (Net Income – Preferred Dividends) / Shares Outstanding
A profitability ratio, earnings per share provides the investor with a measure of the profits of a company, as generated for each share of common stock outstanding. Since the number of shares outstanding can change over time, the metric typically uses a weighted average value.
There are several variations on the earnings per share calculation, including:
- Diluted EPS: which uses the outstanding shares plus convertibles or warrants outstanding
- Trailing EPS: which uses last year’s earnings and common shares (the actual EPS reported in financial statements)
- Current EPS: which uses the current year’s projected earnings
- Forward EPS: which is typically based on analysts’ projections for a future year
Company A’s income statement indicated net income of $4,283,000, and no payment of preferred dividends. The weighted average number of common shares outstanding for this same time period was 706,766. The trailing EPS for Company A would be:
= ($4,283,000 – $0) / 706,766, or $6.06 per share