EPS that is adjusted for potential share delusion and extraordinary items are commonly reported by a company. The company’s profitability is dependant on its EPS, the higher the EPS, the more the company is considered to be profitable.
Formula and calculation for EPS – The net income or the earnings or profit, are divided by the available shares in order to calculate the earnings per share value. The numerator and denominator are adjusted for shares that could be created through convertible debt, options, or warrants, in order to do a more refined calculation. If the numerator of the equation is adjusted for continuing operations, then it is more relevant.
Earnings per share = Net income preferred dividends / End of period common shares outstanding
The income statement and the balance sheet are used to find the period-end number of common shares, if there’s any dividends paid on preferred stock, and the net earnings or income in order to calculate a company’s EPS. Using a weighted average number of the common shares over the reporting term is more accurate as over time, the number of shares can change. In the calculation of the weighted average number of shares outstanding, any stock splits or dividends that occur must be reflected. By using the number of shares outstanding at the end of a period, calculations are simplified by some data sources.
When determining a firm’s profitability in an absolute basis, the most important metrics employed is the Earnings per share. Also, while calculating the price to earnings or P/E value ratio, ESP is a major component, here in P/E the E refers to EPS. An investor can see the value of a stock in terms of how much the market is willing to pay for each dollar if earning by dividing that company’s share price by its earnings per share.
In order to pick stocks, EPS is one of the many indicators that you could you use. Your next step would be to choose a broker that works for your investment style, that is, if you have an interest in investing or stock trading.
Since ordinary shareholders do not have direct access to the earnings, comparing the EPS in absolute terms may not have much meaning to investors. Instead, to determine how the investors feel about future growth and the value of the earnings is determined by the investors, by comparing EPS with share price of its stock.
The dilutive effect of shares that could be issued by the company are not factored by the basic EPS. The investments like warrants, stock options, or RSU (restricted stock units), if exercised could increase the total number of shares outstanding in the market, when the capital structure of a company includes those items.
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