How do investors usually decide which stocks to buy or sell? There is a way that business owners use to communicate their financial performance to their stakeholders. It is done through EPS- Earnings Per Share. Now, what is EPS?
EPS is a key metric that shows how much profit a company makes for each share of its common stock. EPS is widely used by investors, analysts, and managers to evaluate and compare different companies or stocks. EPS also influences the stock price, dividends, and corporate decisions.
However, EPS is not as simple as it sounds.
There are different types of EPS, different ways to calculate it, and different factors that affect it. EPS can also be manipulated, misinterpreted, or misunderstood by various parties.
In this blog, we will explain everything you need to know about earnings per share.
What is EPS in the Stock Market
EPS full form in share market- EPS stands for earnings per share.
Earnings per share (EPS) is one of the most important financial ratios that investors use to evaluate a company’s performance and profitability. It’s a measure that shows how much profit a company makes for each share of its stock.
The earnings per share ratio (EPS ratio) compares the EPS of different companies or stocks. It assesses relative profitability and value within the same industry or market.
How to Calculate Earnings Per Share: EPS Formula
To understand the process of calculating EPS, you need to know the Earning Per Share Formula:
EPS= Net Income−Preferred Dividends/Outstanding Common Shares
- Net Income- This is the profit a company makes after deducting all expenses, taxes, and interest from its total revenue.
- Preferred dividends- The payments that a company makes to its preferred shareholders..
- Total Number of Outstanding Shares: This represents the total number of shares that investors own in the company.
Earnings Per Share Example
Let’s take an example of ABC Company to understand how to calculate Earnings Per Share (EPS):
- Let us say that ABC Company’s income statement has a net income is Rs. 15 lakh.
- ABC Company has preferred shareholders to whom it pays Rs. 3 lakh in dividends.
- Suppose ABC Company has 5,00,000 common shares outstanding.
Using earnings per share formula, the EPS in the stock market for ABC company’s shareholders will be:
Net Income−Preferred Dividends = Rs.15,00,000−Rs.3,00,000 =Rs.12,00,000/ 5,00,000= Rs.2.40 per share
So, the Earnings Per Share (EPS) for ABC Company is Rs. 2.40 per share.
This calculation shows how much profit ABC Company is generating per share of common stock outstanding.
Types of EPS
Here’s a brief about the various types of Earnings per share in the stock market.
Basic EPS
Basic EPS is a key metric that shows how much profit a company earns for each outstanding share. It’s calculated by dividing the company’s net income by the weighted average number of common shares.
Diluted EPS
Diluted EPS considers the potential dilution of shares from securities like stock options or convertible bonds. It provides a more conservative measure of earnings per share.
Trailing EPS
Trailing EPS looks at a company’s earnings per share over the past 12 months. It provides a historical view of a company’s performance.
Forward EPS
Forward EPS is an estimate of a company’s future earnings per share. It gives investors an insight into the expected financial performance.
Now, what often concerns investors most is the concept: basic EPS vs diluted EPS.
Let us understand their difference.
Basic EPS vs Diluted EPS
Basic EPS and diluted EPS both show how much profit a company earns per share of its common stock.
To calculate Basic EPS, divide the company’s net income (excluding preferred dividends) by the number of outstanding common shares.
It does not consider convertible securities like options or convertible debt.
Diluted EPS is calculated by dividing the net income (excluding preferred dividends) by the number of outstanding common shares plus all dilutive securities.
The key difference: Diluted EPS assumes all convertible securities are converted, making it a more cautious measure than Basic EPS.
Diluted EPS is always equal to or lower than Basic EPS.
| Basic EPS | Diluted EPS |
| Shows company’s profit per share | Adjusts for potential dilution from stock options, convertible bonds, etc. |
| Calculation: Net income divided by total common shares outstanding. | Calculation: Adjusted net income divided by total potential common shares outstanding, considering options, convertible securities, etc. |
| Provides a straightforward measure of earnings per share. | Provides a more conservative measure, accounting for maximum potential dilution. |
Adjusted EPS (Earnings Per Share Excluding Extraordinary Items
Sometimes, companies have one-time events like selling a building or facing unusual expenses. Adjusted EPS removes these events to give a clearer picture of the company’s regular profitability without the impact of these exceptional items.
Retained EPS (Retained Earnings Per Share)
After a company earns money, it can either distribute some to shareholders as dividends or retain it for future use. The retained earnings are called Retained EPS. Companies use these funds for growth initiatives such as expanding operations or improving products.
EPS and P/E Ratio
EPS tells you how much profit a company makes for each share of its stock.
It’s like the points a player scores in a game, showing how well the company is doing financially.
The P/E Ratio is like a price tag for a company’s shares. It reveals how much investors are willing to pay for each rupee of profit the company earns.
A high P/E Ratio suggests that investors expect the company to grow significantly.
Importance of Earnings Per Share
EPS tells you how much money a company earns for each share you own.
If a company has a high EPS, it means it’s making a good profit for each share.
- Shows How Well a Company Makes Money: EPS tells us how much profit each share of a company’s stock brings in.
- Helps Compare Companies: It lets investors see how one company’s earnings per share stack up against others in the same industry.
- Estimates Stock’s Worth: EPS helps figure out how much a company’s stock might be worth.
- Decides Dividends: It helps companies decide how much of their earnings they can share with shareholders as dividends.
- Shows Financial Strength: A higher EPS can show that a company is strong financially.
A few Things to Keep in Mind: EPS in the Share Market
Earnings per share is indeed a useful measure. However, you must know these things!
- Numbers Can Be Changed: Sometimes, companies can make their EPS look better through accounting tricks.
- Doesn’t Tell the Whole Story: EPS doesn’t tell us everything about how reliable a company’s earnings are.
- Use It Carefully: Investors should look at EPS along with other things to make smart choices about investing.
This can be good for you as a shareholder because it could mean you might get more dividends, or the value of your shares might go up.
So, the higher the EPS, the better for investors.
What is a Good EPS?
What makes a good EPS depends on factors like recent company performance, competitor status, and analyst predictions.
Even if EPS rises, stock prices could fall if analysts expect higher earnings.
Conversely, if analysts expected worse, a decreasing EPS might still lead to a price increase.
A good EPS is always evaluated alongside share price, including metrics like P/E ratio and earnings yield.
FAQs| Earnings Per Share
A good EPS (Earnings Per Share) ratio generally indicates a company’s profitability, with a higher EPS suggesting more profit per share of stock.
The use of EPS is to measure how much money a company makes for each share of its stock, helping investors gauge corporate value and stock performance.
EPS stands for earnings per share. It is calculated by dividing a company’s net income (minus preferred dividends) by the number of common shares outstanding.
EPS stands for Earnings Per Share. It tells investors how profitable a company is by showing how much money it earns for each share of its stock.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.