Earnings Per Share

Earnings Per Share (EPS) is a financial metric that indicates the portion of a company’s profit attributed to each outstanding share of common Stock. It is calculated by dividing the net earnings available to shareholders by the number of Outstanding Shares. EPS is often used by investors to gauge a company’s profitability and financial health.

Formula:

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

Examples:

  • If a company has a net income of $1 million, pays $100,000 in preferred dividends, and has 900,000 shares outstanding, the EPS would be:
  • EPS = ($1,000,000 – $100,000) / 900,000 = $1.00
  • In another case, if a company reports a net income of $500,000, has no preferred dividends, and has 500,000 shares outstanding, the EPS would be:
  • EPS = $500,000 / 500,000 = $1.00

Cases:

  • In a company with increasing net income, EPS tends to rise, which is generally a positive sign for investors.
  • A negative EPS indicates that a company is losing Money, which can be a warning sign for potential investors.
  • Companies may also report diluted EPS, which accounts for potential shares that could be created through convertible Securities, Options, or warrants.