Earning Per Share

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.



Calculated as:

= (Net income-Dividend on preferred stock) / (Average outstanding share)



In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

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EPS = Net Earnings / Outstanding Shares

Using our example above, Company A had earnings of Rs.100 and 10 shares outstanding, which equals an EPS of 10 (Rs100 / 10 = 10). Company B had earnings of Rs.100 and 50 shares outstanding, which equals an EPS of 2 (Rs.100 / 50 = 2).

So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, we need to look at some ratios.

Before we move on, you should note that there are three types of EPS numbers:
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Trailing EPS

– last year’s numbers and the only actual EPS

Current EPS

– this year’s numbers, which are still projections

Forward EPS

– future numbers, which are obviously projections

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