Earnings Per Share

  

Earnings Per Share (EPS) is the profit portion of a company allocated to each outstanding share of the common stock. It is generally used as an indicator of the profitability of a company.

Earning Per Share is calculated as :-

EPS = [(Net Income) – (Dividends on Preferential Stocks)] / [Weighted

Average of Outstanding Common Shares]

Usage of weighted average of outstanding shares gives more accurate result of EPS than the end-of-the-period outstanding shares because the number of outstanding shares might change over a span of time.

In the calculation of EPS , only the dividends declared in the current fiscal year are subtracted. But there are also exceptions in this case. When the preferred shares are cumulative in nature then only the annual dividends are subtracted regardless of the fact that they are declared or not.

EPS has two parts, namely, earning and outstanding shares of the company.

•  Earning of a company is calculated as

•  its net income in the last 12 months, or

•  its net income in the coming 12 months (based on the prediction of the analysts)

•  Calculation of the Outstanding shares can be done

•  Basic Earnings Per Share — only the currently outstanding shares

•  Diluted Earnings Per Share — all the potentially viable shares that can enter the market.

An example of EPS will help to elucidate the idea. Let us suppose that last year a company named X has earned $100. The total shares outstanding in the market be 100. Then the Earning Per Share of Company X would be $1.

Earning Per Share is one of the most important determinants of Share Price of a company.

An important aspect of Earning Per Share is a comparative study on the amount of capital required to generate earnings of a company.

eg. Let us suppose that two companies, say A and B, are capable of generating the same EPS figure. But Company A issued less equity than Company B. Hence, Company A would be considered as the better company in terms of profitability (profit generated per unit cost) because it has been able to utilize the available capital in a more efficient way to generate greater income.

There are different types of Earnings Per Share based on the difference in calculation procedures :-

•  Ongoing Earnings Per Share

Here, EPS is calculated where the net income is the normalized or the ongoing one and all the unusual earnings are not taken into consideration.

(b) Reported EPS or GAAP EPS

These EPS are derived from the GAAP ( Generally Accepted Accounting Procedures ) guidelines of accounting.

(c) Pro-Forma EPS

Some of the incomes and expenses used in the calculation of Reported EPS are excluded from the calculation of this.

(d) Cash EPS

Cash EPS = (Operating Cash Flow) / (Number of outstanding diluted shares)

(e) Headline EPS

This is the EPS provided by the company to the press and media.