Earnings per share (EPS from the Anglo-Saxon acronym Earnigns Per Share) is a fairly common term in the financial language. They represent the portion of the company's profit that is recognized to a share that represents a part of the share capital. So if you multiply the EPS by the total shares of the company, you will get the total net income of the same company. EPS is an indicator that equity market observers pay particular attention to.
Steps
Method 1 of 3: Elementary Formula for Calculating Earnings Per Share
Step 1. Find the company's net income or net income for the previous fiscal year (year)
This information can be found on most financial websites or on the company's website itself. The use of the company's net income or profit as a key element of the indicator is the basic form of determining EPS.
- For example, imagine you want to calculate Microsoft's EPS from its net profit. A quick browse of Microsoft's website to find that 2012 net income was approximately $ 17 billion.
- Be careful not to confuse the quarterly net profit with the annual one. Quarterly profits are calculated every three months, while annual profits are calculated every 12 months. Confusing the quarterly and annual net profit means that the result of the EPS indicator will be roughly four times lower.
Step 2. Find out how many shares have been issued
How many shares has the company listed on the stock markets in total? This information can be found by reading a financial information website and identifying the section dedicated to the company you are reviewing.
Continuing with Microsoft's example, as of the date this article was written Microsoft had issued 8.33 billion shares
Step 3. Divide the net profit by the number of shares issued
Continuing to take Microsoft's fundamentals into account, we will have to divide $ 17 billion by 8.33 billion shares to arrive at an elementary EPS indicator of around 2.
Let's take another example. Let's say a boules company has a net profit of $ 4 million and has issued 575,000 shares. We divide the $ 4 million by 575,000 and we get an EPS of 6.95
Method 2 of 3: Weighted Earnings Per Share Calculation Formula
Step 1. To get the weighted earnings per share indicator, just slightly modify the elementary formula
Weighted EPS is a more accurate indicator because it takes into account the dividends the company pays out to shareholders. However, this formula is more complex than the basic one, so even if it is more accurate it is not used very often.
Step 2. Locate a company's dividends among your favorites
The dividend is a sum of money that is paid to shareholders - usually quarterly - based on the company's profits.
As a hypothesis, let's take Apple to try to calculate the indicator we are studying. In 2012, Apple announced it would pay $ 2.5 billion in quarterly dividends starting in the third quarter. Which meant about $ 5 billion a year
Step 3. Take the company's net profit and subtract the dividends
Going back to the Apple example, a quick search reveals that in 2012 Apple hit $ 41.73 billion in net profit. Subtracting the $ 5 billion in dividends from the 41.73 billion net profit, we get to 36.73 billion.
Step 4. Divide this difference by the average number of shares issued
Apple's net income after dividends in 2012 was $ 36.73 billion. Divide this amount by the number of shares issued, 934.82 million, and you get the weighted EPS which is approximately 39.29.
Method 3 of 3: Using the Earnings Per Share Indicator
Step 1. The EPS indicator is used as a barometer to understand the profitability of a company
EPS provides clues to investors and potential investors about a company's profitability. A high EPS usually indicates a solid and profitable company. However, like most numbers and indicators, EPS should not be analyzed alone. There are no fixed rules for the EPS values above which a stock should be bought and below which it should be sold. It is essential to read the EPS of a company by relating them to those of other companies.
Step 2. You need to know that more than other indicators EPS is probably the only and most important factor influencing the price of a stock
Looking at the EPS of companies is more indicative than looking at their profits because EPS looks at the profits from a perspective perspective. (A large company that produces $ 1 million in net profit is not particularly attractive; while a small company that generates the same $ 1 million in net profit is.) EPS is also one of the factors you need to evaluate. Price / Earnings index (Price to Earnings P / E).
Step 3. You need to know that EPS valuation is not sufficient to make an informed decision whether to invest or not
EPS tells you how one company is performing compared to another, or compared to its reference sector, or to industry in general, but it will never tell you at first sight if investing in the company is a bargain. or if this is overrated. In order to make an informed decision whether or not to invest in a stock, you must also consider the following as a minimum:
- market capitalization
- the share price
- dividends or capitalizations
- long-term financial forecasts
- adequate liquidity
Advice
- When deciding whether or not to invest in a company, EPS is often considered instead of the total profit earned. This indicator is so popular because it immediately and faithfully represents how profitable the company is.
- When calculating these formulas and indicators, the number of shares issued is considered. The higher the number of shares involved, the more the earnings per share will be diluted.
- Almost all the information needed to calculate this indicator can be found on the internet. Just consult a financial information site and look for the company's financial statements and other documents it has published.
- Always keep in mind if you are calculating weighted EPS or elementary formulation. In some situations these indicators differ in negligible amounts, but it is essential to keep in mind whether one is analyzing one formula or the other: elementary EPS for a more general estimate; weighted EPS which considers indicators that change over time.
