Earnings Per Share or EPS is the total earnings divided by the number of shares outstanding. Over the reporting term, most companies often make use of a weighted average of shares outstanding. The Earnings Per Share that is calculated for the previous year is called the Trailing EPS.
Current EPS is calculated for the current year while Forward EPS is calculated for the coming year. The first one is the actual EPS while the other two are estimates. The Earnings Per Share indicates a company’s profitability because, technically speaking, because it is a portion of the company’s profit allocated to each outstanding share of common stock.
Using a weighted-average number of shares outstanding over the reporting term gives accuracy to the Earnings Per Share calculation for the number of shares can change overtime.
The calculations are sometimes simplified by the data sources by using the number of shares outstanding at the end of the period. The Diluted EPS includes the shares of warrants or convertibles outstanding in the outstanding number of shares along with Basic EPS.
Earnings Per Share is perhaps the most important variable while determining the price of a share. While deriving the Price-to-Earnings Valuation Ratio, the EPS is an important variable. The ways of calculating Earnings Per Share are as follows:
According to the basic formula, Earnings Per Share = Profit/Weighted Average Common Shares
According to the net income formula, Earnings Per Share = Net Income/Weighted Average Common Shares
According to the continuing operations formula, Earnings Per Share = Income From Continuing Operations/Weighted Average Common Shares
The preferred dividends got from categories outside net income and continuing operations is not included in Earnings Per Share formula. The EPS for net income and continuing operations are far more difficult operations because the preferred dividends are not included in net income before the calculation of EPS. The common stock is not as important as preferred stock rights. The preferred dividends of the current year are deducted, but when the preferred shares are cumulative, the annual dividends are deducted regardless of their declaration.
Last Updated on : 26th June 2013