Earnings per Share Calculator
If you happen to invest in companies on the stock market, you probably own quite a lot of shares. With the use of this earnings-per-share calculator, you will be able to assess their real value in just a few clicks. This tool will teach you how to calculate your earnings per share and provide you with a foolproof EPS formula.
Earnings per share definition
The earnings per share (EPS) is the portion of a company's total profit allocated to each of the shares held by the company's shareholders. It is one of the most important variables used to determine the profitability of investing in a given stock.
One of the ways to make an informed investment decision is to compare the EPS figures for one company over a long time period. You can also compare EPS values for a few companies within the same industry to choose the most profitable one.
Earnings per share takes into account common stock only; the preferred stock does not influence the value of the shares.
Earnings per share formula
To calculate earnings per share, simply use this EPS formula:
EPS = (Net income – Dividends on preferred stock) / Average outstanding common shares
Net income– Total earnings (profit) of the company, calculated as the costs subtracted from the total revenue.
Dividends on preferred stock– Preferred stock is a class of assets that gives the shareholders priority over the common stock. Even though preferred shares give a higher yield and are more secure (in the case of company liquidation, these shareholders receive the money first), they don't carry voting rights. Dividends on preferred stock are simply the monthly or quarterly payments obtained by the shareholders.
Average outstanding common shares– Number of shares currently held by the shareholders. This number usually fluctuates over time – for example, it increases when the company issues additional shares and decreases when it buys back its shares.
How to calculate earnings per share
Determine the net income of the company. Let's assume that it is equal to $3.12 billion.
Calculate the total sum of dividends on preferred stock. We can assume it is equal to $200 million.
Determine the number of outstanding common shares for this company. We can choose a number of 333.4 million.
Use the earnings per share formula:
EPS = (net income – dividends on preferred stock) / average outstanding common shares
EPS = ($3,120,000,000 – $200,000,000) / 333,400,000 = $8.76
The EPS value for this company is equal to $8.76. If the company decided to buy back 50 million shares, its value would increase:
EPS = ($3,120,000,000 – $200,000,000) / 283,400,000 = $10.30
Applications of earnings per share
The EPS value is commonly used in methods of company valuation, as you can see in our discounted cash flow calculator and price-earnings ratio calculator.
In the stock market, to find great investment opportunities, you look for companies with high earnings per share growth. Specifically, you should look for companies reporting over 10% EPS compound annual growth rate. Find out this value with our earnings per share growth calculator.
Four extra recommendations for your investments
In the stock market, if you are sure of your investment, you can try to reduce your average cost per share. Then, any later return on the investment will be higher because it would be compared to a smaller investment cost.
You also have to consider your company operating efficiency. One way of doing that is to measure the EBITDA margin. Remember, you should look for a positive EBITDA margin, which is growing. That indicates a company that is doing better and better over time and might give you a considerable ROI in the near future. You can obtain its value with our EBITDA margin calculator.
When finding stocks that show constant earnings per share growth, you will realize that they have a high stock beta. Don't be surprised; it's normal. Just be aware that during bull markets, such stocks will not only provide you better returns than the stock average but also will come with a larger drawdown in a market crash.
Another way of making money in the stock market is by buying call or put options. With a stock that shows impressive earnings per share growth, we recommend you consider buying call options. Contrarily, if the EPS growth is contracting, you might consider purchasing a put option. Our call option calculator estimates how much profit/loss you can make with this.