What is EPS (Earnings Per Share)?

EPS which stands for ‘Earnings Per Share’ is one of the important factors in the fundamental analysis of the company that helps in making the investment decision in the company. It gives investors a quick valuation of stock, it’s a very common metric that helps you understand how much profit a will a shareholder will get on their shares.

Earning Per Share (EPS)

EPS is a common financial metric to understand the company value or company performance. It is the term important for the investors who invest in the stock market. The name itself is defined as the money that a company makes for each share of its stock. Higher the EPS, the higher the profit of the company. EPS numbers are more important when it is compared with other companies in the same sector. Furthermore, the EPS of a company helps to calculate the P/E ratio of the company, to check whether the company is undervalued or overvalued. EPS is also called ‘normalized earning per share’ because sometimes company removes their one-time expenses, to show better profits. EPS does not indicate the debt of the company.

EPS Calculation

Earning Per Shares = Net Income - Preferred Dividend/Average Number of Outstanding Shares

To calculate EPS one should refer to the balance sheet of the company, in this balance sheet three points are to be noted, net income, preferred dividends, and several common shares. For example, if a company has a net income of 8 lakhs and he pays 2 lakh as preferred dividends and has 3 lakhs common shares in the market then EPS is calculated by (8 lakh- 2 lakh)/3 lakh = Rs 2 per share. It is not always dividends declared by the company, so sometimes the preferred dividend can be 0. Now the question may arise why preferred dividends are deducted from the net income. The answer is EPS represents only the profit that is available to the common shareholders and preferred dividends are to be deducted from the net income before giving profit to the common shareholders.

There is another term Diluted EPS, in this diluted EPS the formula goes one step further i.e.; it will consider all the convertible securities, For example, the company can convert all the preferred stocks as a common stock for the time being. This will increase the number of shareholders thus decreasing the earnings per share. Therefore, Basic EPS is always greater than Diluted EPS.

EPS Excluding extraordinary profits/loss, in this case, suppose the company has some unexpected profit/loss but that profit/loss may not happen again in the future. For example, if the company sells its land it occurs a huge profit for the company and that can reflect in EPS also suppose there is a fire in the company factory that will provide loss to the company. Hence, investors are interested to know the EPS without any extraordinary profit or loss for the company.

Types of EPS

There are several variations of the EPS that you can consider. 

Trailing EPS: In this type, you will be provided the past year’s EPS of the company. Most investors are interested in this EPS for comparison.

Current EPS: This type is calculated for the current month data given by the company. 

Forward EPS: Depending on the future estimation, on the current data available analysts give estimated EPS for the future. Some other types are given below

EPS	Meaning
Reported or GAAP EPS	It is calculated by using the standard of Generally Accepted Accounting Principles
Ongoing or Pro-Forma EPS	unusual income is removed from the net income retained
Retained-EPS	Companies instead of giving dividends retain their profit for business expansion
Cash EPS	It is calculated by  Cash EPS = Operating Cash Flow/Diluted Shares Outstanding.
Book Value EPS	It is used to estimate the worth of the company if the company is liquidated by using the current balance sheet of the company

Lastly, EPS is not the only factor to be considered, other parameters are also equally important, invest your money by keeping the other financial parameters in mind.