Earnings Per Share

Definition of Earnings Per Share

The term “earnings per share” (EPS) refers to the dollar amount of the net income that has been earned by the owners of the common stock (a.k.a. shareholders) at the end of a period (quarterly or yearly). In other words, EPS assesses the ability of a company to generate net profits for the common shareholders. However, it is not necessary that the company will distribute the entire net earnings to the shareholders, it may hold back a part of it to re-invest into the business to induce further growth.

Although EPS is an indicator of a company’s profitability and its distribution among the shareholders, it makes more sense when analyzed in conjunction with the share price and the number of outstanding shares. Investors usually consider EPS along with the share price as one of the major decision-making factors while analyzing the stocks of companies within the same industry. A higher EPS is preferable because it indicates a better return on the amount invested in purchasing the share.

Formula

The formula for EPS can be derived by dividing the difference between the net income generated and the distributed preferred dividend by the weighted average number of shares outstanding.

Mathematically, it is represented as:

Examples of Earnings Per Share (With Excel Template)

Let’s take an example to understand the calculation of the Earnings Per Share in a better manner.

Example #1

Let us take the example of an ice cream manufacturing company to illustrate the computation of EPS. The company has its manufacturing unit in the village of Buffalo Grove, Illinois (USA). During 2018, the company reported a net income of $25 million, out of which $5 million has to be paid out to the preferred shareholders. The number of shareholders of the common stock at the start of the year was 4.5 million that went up to 5.5 million with the issuance of new shares in the middle of the year. Calculate the EPS of the company for the year 2018 based on the given information.

Solution:

Weighted Average No. of Shares Outstanding is calculated using the formula given below:

Weighted Average No. of Shares Outstanding = (No. of Outstanding Shares at The Start of The Year + No. of Outstanding Shares at The End of The Year) / 2

• Weighted Average No. of Shares Outstanding = (4.50 million + 5.50 million) / 2
• Weighted Average No. of Shares Outstanding = 5 million

Earnings Per Share is calculated using the formula given below:

EPS = (Net Income – Preferred Dividend) / Weighted Average No. of Shares Outstanding

• EPS = ($25.00 million – $5 million) / 5 million
• EPS = $4.00 per share

Therefore, the company made an EPS of $4 per share during the year 2018.

Example #2

Let us take the example of Apple Inc.’s latest annual report to calculate EPS. During 2018, the company made a net income of $59.53 billion with a weighted average number of shares outstanding of 5.00 billion. Calculate the EPS of Apple Inc. for the year 2018 based on the given information.

Solution:

Earnings Per Share is calculated using the formula given below:

EPS = (Net Income – Preferred Dividend) / Weighted Average No. of Shares Outstanding

• EPS = ($59.53 billion – 0) / 5.00 billion
• EPS = $11.91 per share

Therefore, Apple Inc. generated an EPS of $11.91 per share during 2018.

Source Link: Apple Inc. Balance Sheet

Example #3

Let us take the example of Walmart Inc. to illustrate the computation of EPS. The company reported a net income of $10.52 billion during the year 2018, out of which $0.66 billion has been contributed to the non-controlling interest. Calculate the EPS of Walmart Inc. for the year 2018 if the weighted average common shares outstanding is 3.01 billion.

Solution:

Earnings Per Share is calculated using the formula given below

EPS = Net Income – Net Income Attributable to Non-Controlling Interest / Weighted Average No. of Shares Outstanding

• EPS= ($10.52 billion – $0.66 billion) / 3.01 billion
• EPS = $3.28 per share

Therefore, Walmart Inc.’s EPS for the year 2018 stood at $3.28 per share.

Source Link: Walmart Inc. Balance Sheet

Advantages of Earnings Per Share

Some of the advantages of earnings per share are:

• It is usually used as a measure to price the stocks such that stocks with higher EPS attract higher prices.
• It captures the overall profit per share after paying off all the liabilities such as interest on the debt, the dividend for preference shareholders, etc.

Limitations of Earnings Per Share

Some of the limitations of earnings per share are:

• The companies can manipulate the EPS by reducing the number of outstanding shares by buying back their own shares or reverse splitting of stocks.
• EPS per se doesn’t capture the performance of the company as it fails take into account the price of the share. EPS along with the share price can be used to check the rate of return.

Conclusion

So, it can be concluded that although EPS is a very important metric for investors, it should be seen in conjunction with the share price in order to draw meaning insights. One should also keep track of any kind of change in the outstanding number of shares due to stock split, reverse split, share re-purchase, etc.

1. Earnings Per Share Formula
2. Cash Flow From Operations Ratio
3. Shareholders Equity Formula
4. Shares Outstanding Formula