Earnings per Share — EPS, a portion of the company’s profit allocated to each share. EPS are used to evaluate the profitability of the company. EPS basic formula is calculated as follows: company net income minus dividends divided by all existing shares.
How to Calculate Earnings Per Share
To calculate EPS, your company secretary needs to divide the company net income by the available shares. There is a more refined way when you adjust for shares that could be created through tools such as options, warrants, etc. For the basic calculation you need your balance sheet and income statement. These will allow you to identify the number of common shares for the period-end, the dividends paid (if any), and the net income of earnings. Consider using the weighted average of common shares as the exact number can change.
How is EPS used?
EPS is crucial to determine the price of your company’s shares. It is also widely used to calculate price-to-earnings. When you divide your company’s share price by its EPS you can show the investors your stock’s value supported by the market data. The investors rarely look at the absolute EPS number since the ordinary shareholders can not receive the earnings directly. They usually compare EPS to the share price of the stock to see the value of earnings and make an estimate of potential future growth.
What is basic and diluted EPS?
There is a basic and diluted EPS. The regular formula describes the basic EPS. It does not factor the effect when company issues additional shares, diluting the EPS value. The company can also affect the share value by using tools such as stock options or warrants, which can increase the amount of shares in the market. To allow for this variable, the companies usually report the diluted EPS, which considers all the hares that could potentially be issued within a given period. For example, if in 2019 a company could theoretically convert all the outstanding instruments into S$20 million. The amount of actual existing shares is $S80 million. Then the diluted EPS would be divided by S$100 million, not $S80.