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 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 take into account common stock only; the preferred stock has no influence on 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

where:

  • 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 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: the 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

  1. Determine the net income of the company. Let's assume that it is equal to $3.12 billion.

  2. Calculate the total sum of dividends on preferred stock. We can assume it is equal to $200 million.

  3. Determine the number of outstanding common shares for this company. We can choose a number of 333.4 million.

  4. 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

  1. 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

  1. The EPS value is commonly used in the discounted cash flow method of company valuation or in the P/E ratio.

  2. In the stock market, for finding out great investment opportunities, you look for companies with high Earnings per share growth. Specifically, you should look for companies that are reporting over 10% EPS compound annual growth rate.

Two extra recommendations for your investments

  1. In the stock market if you are sure of your investment, you can try to reduce your average cost per share. Then, any posterior return to the investment will be higher because it would be compared to a smaller investment cost.

  2. In the stock market, 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 EBITDA margin positive and growing. That indicates a company that is doing better and better over time and might give you a considerable ROI in the near future.

Bogna Szyk
People also viewed…

Free fall

Our free fall calculator can find the velocity of a falling object and the height it drops from.

Markdown

The markdown calculator shows you what is the required list price of your product.

PMI

PMI calculator estimates the private mortgage insurance you'll pay for a mortgage loan based on your credit score and a corresponding PMI rate.
main background