Investing 101: Earnings per Share Formula for Beginners

In this article, we are going to have a look closely at the earnings per share formula – including why it is important, what it is used for, what it indicates, and how it can be worked out. Earnings per share (commonly abbreviated to EPS) is a financial figure based on a calculation  that show […]

In this article, we are going to have a look closely at the earnings per share formula – including why it is important, what it is used for, what it indicates, and how it can be worked out.

Earnings per share (commonly abbreviated to EPS) is a financial figure based on a calculation  that show the past profitability of a company, the present profitability of a company, as well as that profitability that it could experience in the future. The EPS can be calculated by first establishing the net income (the net income is the income that a company makes after overheads have been considered), and then dividing this number by the total number of outstanding shares that the company in question has. If you are new to the stock market and the world of investing, you may not know exactly what ‘outstanding shares’ refers to – it refers to the number of shares that a company has that are not held by them, for example those that are held by its various different types of shareholders, no matter how big or small they may be individually. In simple terms, it is a calculation that one can execute and that can be useful as part of the decision in whether or not one would like to make an investment in the company in question, and whether or not they think the idea is a financially wise one.

The earnings per share (EPS) therefore, refers to what proportion of  a company’s profit has been dedicated to each individual share of that company’s stock. People regard this measure very highly, most particularly those that are interested in and that invest in the stock market actively – investors and traders. It is generally accepted that if a company has a higher earnings per share value than another, then it also has a better level of profitability and is therefore usually the more desirable option for investment. When the earnings per share is being calculated, it is recommended that a weighted ratio is made use of, since the number of shares that an organisation has in different types and places can be a varying one over the course of time naturally. The ‘weighted average’ of a company refers to the number of outstanding shares, more specifically, how much the number of outstanding shares that a company has, has changed over time, and whether or not it has at all! It is considered to be an important calculation to make prior to working out the earnings per share, in order to obtain a more accurate reading of where the company could be in the future, and to ensure that the earnings per share value that is obtained is not just one that is based on recent successes and endeavours of the company.

With the weighted earnings per share in mind, there are two different ways that the earnings per share value of a company can be calculated. It can be calculated firstly as the normal earnings per share, which is done by establishing the net income of the organisation in question after tax and then dividing this number by the total number of the outstanding shares that a company has. Alternatively, it can be calculated and a more realistic result can be obtained by calculating the weighted earnings per share value, which is done by taking the total dividends away from the net income after tax, and then dividing this number by the total number of outstanding shares that the company in question has.

The earnings per share value can be a provider of valuable information to a potential investor, depending on what type of investment that said investor is looking for.

The earnings per share value can be a provider of valuable information to a potential investor, depending on what type of investment that said investor is looking for. For example, an investor may be in search of an investment that is slightly more risky but that could provide extremely high returns if there risk happened to be worth it. On the other hand, an investor may be looking for an investment that can provide them with a steady source of reliable income that keeps any risk-taking to an absolute minimum. The earnings per share ratio of a company can tell this investor how much room the company in question has in terms of room for expansion to take place, and how reliable an investment they are making, as well as how much potential the investment has to return their needs.

Different types of Earnings Per Share Measure

There are many types of earnings per share measures that exist, three of which get the most focus from investors and shareholders.

Trailing EPS – the ‘trailing EPS’ is the earnings per share that the company in question had throughout the course of the previous financial year. It is an accurate reading to think about since it is based on  actual factual financial happenings within the organisation being looked at – it is not merely guesswork that is based on predictions on the company and how they think their business year is going to end up. However, the main problem with this figure is that it does not refer to what is relevant at the current time – a company’s profits can be extremely different 10 months apart.

Current EPS  the ‘current EPS,’ refers to the earnings and the numbers of the company at the present time. This figure can be based on differing data however, in that a certain amount of the data will be factual and will use recent factual information surrounding the organisation in question, whilst the remainder of the data will be made up of reasonable predictions. The accuracy of this number is very much reliant on what stage of the financial year the company is in when the readings are made.

Forward EPS – ‘forward EPS’ is a number that is based on the profits that the organisation believes they will be making at some point in the future. These estimations are made either by the company in question, or stock market analysts. Anyone that is seriously considering investing in a company should consider these values, since they can be a good indicator as to what the future holds for the company.

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