The Earnings Per Share, abbreviated EPS and in English Earnings per Share (EPS), indicates how much earnings per share a company has made in a given period .
The most commonly used period is one year, but earnings per share are often also calculated per quarter. The earnings per share provides an indication of how much dividend can be paid out per share and how much is left to grow the organization.
In this article I briefly discuss the earnings per share and how to use it when valuing shares.
- Calculate earnings per share
- Example earnings per share
- Outstanding and diluted earnings per share
- Use EPS & Disadvantages of EPS
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Calculate earnings per share
You calculate the profit per share by dividing the profit by the number of outstanding shares. This looks like this:
EPS = Net income / Number of shares issued *
* This excludes preferred stock which, like debt, is considered a financial liability. In some cases, preference shares receive the same economic rights as normal shares, with the exception of the voting right. In that case, preference shares do count.
* The number of outstanding shares can be calculated differently. We will discuss this in more detail under the heading diluted earnings per share.
Example: Earnings per share Apple
In fiscal 2018, Apple made net profit of $ 59.3 billion. The number of shares outstanding is 4,955 million or 5,000.1 million when looking at the number of diluted shares. So when we fill in the formula and use the diluted stock, we divide the $ 59.3 billion net profit by 5,0001 billion shares and the result is a profit of $ 11.8656 per share.
Outstanding and diluted earnings per share
Diluted earnings per share , diluted earnings per share in English, takes into account the possible future dilution of the number of shares outstanding . This may be due to the exercise of options already issued. These options will become shares in the future, but are not currently. That is why they do not receive a dividend at this time, for example, but they probably will in the future. As a result, earnings per share will change in the future. Depending on the situation, you can choose to start from the diluted WPA or the normal WPA.
Use Earnings Per Share & Disadvantages EPS
The focus on profit and the number of outstanding shares came over from the US , here the focus on earnings per share is even greater. After a tax change, share buybacks have become fashionable here. A lower number of outstanding shares pushes up the earnings per outstanding share. In Europe, buying shares is not yet that popular, but it is increasing in popularity.
The one-sided focus on profit also has its drawbacks. It can make management no longer willing to start up new projects because these lower profits in the beginning. Paying attention to the number of shares outstanding is important to investors . Should the number of shares rise or fall, this will directly affect the percentage of shares that a shareholder owns.