{"id":4058,"date":"2021-08-20T17:52:19","date_gmt":"2021-08-20T12:22:19","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=4058"},"modified":"2022-05-25T18:31:48","modified_gmt":"2022-05-25T13:01:48","slug":"earnings-per-share","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/earnings-per-share\/","title":{"rendered":"Earnings Per Share Guide 2022 \u2013 Importance, Formula and Calculation"},"content":{"rendered":"\n<p>A company listed on the <a href=\"https:\/\/www.tickertape.in\/blog\/stock-exchanges-in-india\/?utm_source=blog&amp;utm_medium=article\">stock exchange<\/a> aims to maximise its profits to keep its <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a> happy. A company delivering high profits is seen as a stable organisation with the potential to grow and enjoys a high share price on the exchange.<\/p>\n\n\n\n<p>However, when analysing the financial fundamentals of a company, only looking at the profit earned, in its simplest form, does not depict the company\u2019s true financial health, and potential for future growth. Investors should also look at how this earning translates to each share they own. This is where the concept of earnings per share comes into the picture. Let\u2019s understand.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/earnings-per-share\/#What-is-earnings-per-share\" title=\"What is earnings per share?\">What is earnings per share?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/earnings-per-share\/#What-is-the-importance-of-EPS\" title=\"What is the importance of EPS?\">What is the importance of EPS?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/earnings-per-share\/#EPS-calculation\" title=\"EPS calculation\">EPS calculation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/earnings-per-share\/#The-concept-of-diluted-and-adjusted-EPS\" title=\"The concept of diluted and adjusted EPS\">The concept of diluted and adjusted EPS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/earnings-per-share\/#Types-of-EPS\" title=\"Types of EPS\">Types of EPS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/earnings-per-share\/#To-sum-it-up\" title=\"To sum it up\">To sum it up<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-earnings-per-share\"><\/span><strong>What is earnings per share?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Earnings Per Share, also known as EPS, in short, is the profit earned by a company per unit of its outstanding shares. Let\u2019s simplify.<\/p>\n\n\n\n<p>Say a company has issued 1 lakh shares on the stock exchange. In a quarter if the company earns a profit of Rs 5 lakh, the Earnings Per Share would be Rs 5, i.e. the company earned Rs 5 for each share that it has issued.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"importance\"><span class=\"ez-toc-section\" id=\"What-is-the-importance-of-EPS\"><\/span><strong>What is the importance of EPS?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>EPS is a very important figure used by analysts and investors alike to fundamentally analyze a company. Here are some significant insights that EPS can give:<\/p>\n\n\n\n<ul><li><strong>Comparison across companies: <\/strong>EPS allows investors to not only compare companies in the same sector but also across all <a href=\"https:\/\/blog.tickertape.in\/market-capitalisation-meaning\/?utm_source=blog&amp;utm_medium=article\" rel=\"nofollow noopener\" target=\"_blank\">market capitalisations<\/a>. Large-cap companies can earn higher profits compared to mid or small-cap companies. As such, checking only the profit figure in isolation does not give the real earnings potential of the company. However, with the EPS calculation, it becomes easy to find out the earnings generated by a company per share issued. This helps investors find out which company is more profitable for its shareholders compared to another.<\/li><li><strong>Aids <a href=\"https:\/\/www.tickertape.in\/blog\/a-step-by-step-guide-to-fundamental-analysis\/\">fundamental analysis<\/a>: <\/strong>EPS calculation also helps analysts conduct a fundamental analysis of companies. A company with a higher EPS is considered to be more profitable and financially sound. Analysts use EPS as the determining factor of a company\u2019s financial health. It is, often, termed as the bottom line of a company\u2019s worth.<\/li><li><strong>Determination of the value of the stock: <\/strong>Investors use the price-earnings ratio (P\/E ratio) to determine whether a stock is appropriately valued vis-a-vis its earnings. EPS forms an integral part of the calculation of the P\/E ratio. Thus, EPS can help investors assess the value of the stock that they want to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in by helping them calculate the P\/E ratio.<\/li><li><strong>Indicates potential <a href=\"https:\/\/www.tickertape.in\/blog\/cash-dividend-vs-stock-dividend\/\">dividend<\/a> payouts: <\/strong>After retaining a part of their profits, companies usually pay out dividends to their shareholders. This dividend payment is directly linked to the EPS. If the EPS is high, the dividend is expected to be higher and vice-versa. Though a high EPS does not guarantee a high dividend payout (as companies might retain a major part of their profits), it does give an idea about the potential dividends that investors can expect. A company whose EPS increases consistently is expected to increase its dividend payouts too.<\/li><\/ul>\n\n\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href=\"https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fearnings-per-share%2F&#038;text=Higher%20the%20EPS%2C%20more%20profitable%20and%20financially%20strong%20the%20company%20is&#038;via=TickertapeIN&#038;related=TickertapeIN\" target=\"_blank\" rel=\"noopener noreferrer\">Higher the EPS, more profitable and financially strong the company is <\/a><\/span><a href=\"https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fearnings-per-share%2F&#038;text=Higher%20the%20EPS%2C%20more%20profitable%20and%20financially%20strong%20the%20company%20is&#038;via=TickertapeIN&#038;related=TickertapeIN\" target=\"_blank\" class=\"bctt-ctt-btn\" rel=\"noopener noreferrer\">Click To Tweet<\/a><\/span>\n\n\n<h2 class=\"wp-block-heading\" id=\"calculation\"><span class=\"ez-toc-section\" id=\"EPS-calculation\"><\/span><strong>EPS calculation<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>To calculate the EPS of an organisation, the EPS formula is used. This EPS formula is pretty straightforward considering the definition of the word itself.&nbsp;<\/p>\n\n\n\n<p>The Earnings Per Share formula is as follows:&nbsp;<\/p>\n\n\n\n<p><strong>EPS = net income or profit \/ average outstanding common stock<\/strong><\/p>\n\n\n\n<p>However, if the organisation has issued <a href=\"https:\/\/www.tickertape.in\/blog\/preference-share\/\">preference shares<\/a> too, the EPS formula would be tweaked. In such cases, the Earnings Per Share formula would be as follows:&nbsp;<\/p>\n\n\n\n<p><strong>EPS = (net income or profit &#8211; preference dividends) \/&nbsp; average outstanding common stock<\/strong><\/p>\n\n\n\n<p>Let\u2019s understand with a few examples. Consider the following:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>Total number of common stock issued<\/td><td>10 lakh<\/td><\/tr><tr><td>Net profit earned by the company&nbsp;<\/td><td>Rs 5 lakh<\/td><\/tr><tr><td>EPS ratio<\/td><td>Rs 5 lakh \/ Rs 10 lakh = Rs 0.50<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>Now, if you consider that the company had a preference stock of 1 lakh shares, the calculation would change. It would be as follows:&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>Total number of outstanding stock<\/td><td>10 lakh<\/td><\/tr><tr><td>Less: Preference stock<\/td><td>1 lakh<\/td><\/tr><tr><td>Total number of common stock&nbsp;<\/td><td>9 lakh<\/td><\/tr><tr><td>Net profit earned by the company<\/td><td>Rs 5 lakh<\/td><\/tr><tr><td>Less: Dividend paid on preference stock<\/td><td>Rs 0.75 lakh<\/td><\/tr><tr><td>Profit after paying dividend&nbsp;<\/td><td>Rs 4.25 lakh<\/td><\/tr><tr><td>EPS ratio<\/td><td>Rs 4.25 lakh \/ 9 lakh= ~Rs 0.47<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>In some cases, the number of stocks at the end of the accounting period is used while in some cases, the weighted average number of stocks might be used when calculating the EPS.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"concept\"><span class=\"ez-toc-section\" id=\"The-concept-of-diluted-and-adjusted-EPS\"><\/span><strong>The concept of diluted and adjusted EPS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In many cases, you might come across the terms diluted EPS and adjusted EPS. Here\u2019s a quick look into what they mean:<\/p>\n\n\n\n<ul><li><strong>Diluted EPS: <\/strong>Diluted EPS is calculated after considering the convertible debts, options and outstanding warrants that an organisation might have. Since these can affect the outstanding stock when exercised, they might be included in determining the outstanding stock and so, the EPS reduces. This reduced EPS is called the diluted EPS.<\/li><li><strong>Adjusted EPS: <\/strong>Adjusted EPS, on the other hand, changes the numerator, i.e. the profit amount. In calculating the adjusted EPS, the profit or losses arising out of non-core activities of the organisation are removed. Only the core operating profit is considered in the calculation of the adjusted EPS.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"types\"><span class=\"ez-toc-section\" id=\"Types-of-EPS\"><\/span><strong>Types of EPS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>3 main types of EPS are calculated. These are as follows:&nbsp;<\/p>\n\n\n\n<ol><li><strong>Current EPS: <\/strong>This calculates the EPS of the current financial year. Every company issues four quarterly results every year. In the current EPS, the declared, as well as the projected earnings of the company, are used to calculate the EPS.<\/li><li><strong>Trailing EPS: <\/strong>As the name suggests, this is the EPS of the past. The earnings of the four quarters of the last financial year are used to calculate this EPS. Trailing EPS is the most commonly used mode of calculating the EPS ratio and shows the accurate figure.<\/li><li><strong>Forward EPS:<\/strong>This EPS looks to the future. The projected profits of the next financial year\u2019s quarters are considered. This EPS is, thus, the potential EPS based on projected figures. This is commonly used by investors as it determines the future profit potential of the stock. Forward EPS is, usually, calculated either by experienced analysts or by the company itself.&nbsp;<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"To-sum-it-up\"><\/span><strong>To sum it up<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>EPS is an important parameter when picking the right stocks to invest in. It gives you an idea of the profitability of a company vis-a-vis the stocks it has issued. A higher EPS is favourable as it increases the dividend potential and also makes the company financially sound. So, when investing, compare between the EPS of different companies and then pick a company with a higher EPS ratio for maximum gains.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Earnings per share or EPS is the profit earned by a company per unit of its outstanding shares. Read on to get complete information on EPS meaning, examples and how to calculate!<\/p>\n","protected":false},"author":46,"featured_media":4000,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[9],"tags":[554,553,556,555],"acf":[],"modified_by":"Neera Bhardwaj","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/08\/Stock-Market-2-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4058"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/46"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=4058"}],"version-history":[{"count":5,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4058\/revisions"}],"predecessor-version":[{"id":8832,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4058\/revisions\/8832"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/4000"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=4058"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=4058"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=4058"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}