Earnings Per Share (EPS)

Earnings per share (EPS) is a key indicator of a company’s profitability, representing the profit allocated to each outstanding share of stock.

It is calculated by dividing a company’s net income by its total number of outstanding shares, either quarterly or annually. Here’s the basic formula:

Formula: EPS = Net Income / Outstanding Shares

EPS is a critical metric that influences stock prices. An increase in EPS over time often signals growing profitability, which can drive up a stock’s value. Investors and analysts use EPS to evaluate past performance and forecast future trends.

This post provides a comprehensive overview of EPS—how it’s calculated, its different types, the differences between basic and diluted EPS, and its limitations.

What is EPS?

Earnings per share (EPS) is the most widely used measure of corporate profitability. It indicates how much profit is available for each share of a company’s stock.

In essence, EPS tells you the portion of a company’s profit attributed to each outstanding share. Whether reported quarterly or annually, EPS can also be projected as forward EPS, with trailing twelve months (TTM) EPS being the most common benchmark.

Analysts often compare EPS quarter-over-quarter or year-over-year to gauge profitability trends, and it plays a central role during earnings calls and future guidance discussions.

Summary

EPS measures the profit earned per share, making it an essential metric for evaluating a company’s financial performance.

How to Calculate EPS

To calculate EPS, divide the company’s net income by the total number of outstanding shares. This data is typically found on the income statement.

Formula: EPS = Net Income / Outstanding Shares

Quarterly financial statements can be found in a company’s 10-Q filings, while annual statements are available in the 10-K. Both documents are typically accessible on the SEC’s website or the company’s investor relations page.

Example EPS Calculation

Below is an example using Pfizer (PFE) for the quarter ending July 3, 2022.

According to its 10-Q filing, Pfizer reported $9,906 million in net income with 5,593 million outstanding shares. The calculation is as follows:

$9,906M / 5,593M = $1.77 quarterly EPS

You can also view EPS data on financial websites like Stocknear, where you can browse by quarter, annual, or TTM.

Summary

EPS is calculated by dividing net income by outstanding shares, with data sourced from the income statement.

Types of EPS

Several types of EPS provide different insights into a company’s profitability:

• Reported (GAAP) EPS: Based on generally accepted accounting principles.
• Adjusted EPS: Excludes one-time events and non-recurring items for a normalized view.
• Ongoing (Pro Forma) EPS: Focuses on regular net income, excluding unusual events.
• Retained EPS: Factors in retained earnings and dividends to show profit retention per share.
• Cash EPS: Uses operating cash flow, providing a more accurate picture of actual cash earnings.
• Book Value EPS: Derived from a company’s balance sheet, indicating equity per share.

Summary

There are several types of EPS, with reported EPS being the standard metric. Other variations offer additional perspectives on profitability.

Basic vs. Diluted EPS

Companies typically report two EPS figures: basic and diluted.

• Basic EPS: Considers only outstanding shares.
• Diluted EPS: Accounts for outstanding shares plus potential shares from stock options, warrants, and restricted stock units.

Basic EPS is usually a bit higher than diluted EPS because it does not include additional potential shares. However, diluted EPS offers a more complete view of a company’s earnings per share.

Summary

Basic EPS considers only current outstanding shares, while diluted EPS factors in potential shares, providing a more realistic view of profitability.

Factors Affecting EPS

Two key factors influence EPS: net earnings and the number of outstanding shares.

• Earnings: Rising net income increases EPS, whereas falling earnings decrease it.
• Shares: A reduction in outstanding shares, such as through buybacks, raises EPS, while issuing new shares lowers it.

In summary, EPS increases when earnings rise or share count falls, and it declines when earnings drop or share count increases.

Summary

EPS is influenced by both net earnings and the number of outstanding shares. Analyzing these trends over time helps assess a company’s financial performance.

Limitations of EPS

Although EPS is a popular metric, it simplifies complex financial data into a single number and has its limitations:

• It may be difficult to compare companies across different industries.
• EPS does not account for important factors like growth rate or market valuation.
• It relies solely on past or projected data, which may not capture future trends.
• Variations in accounting practices can affect EPS comparability.

Additionally, negative EPS for unprofitable companies and potential manipulation (such as through share buybacks or adjusted EPS reporting) highlight the need to consider other metrics like operating income and free cash flow.

Summary

While EPS is a key measure of profitability, its limitations necessitate a broader analysis using multiple financial metrics.

Defining a "Good" EPS

Generally, a higher EPS indicates stronger profitability relative to a company’s stock price. However, what constitutes a “good” EPS can vary by industry and growth stage.

High-growth companies might even report negative EPS while investing in future expansion. Consistently exceeding EPS estimates and comparing trends against industry peers can provide a more accurate assessment.

Summary

A higher EPS generally signals robust profitability, but its evaluation should consider industry norms, trends, and consistency in meeting or exceeding analyst expectations.

Relationship Between P/E and EPS

The price-to-earnings (P/E) ratio and EPS are interconnected. While EPS measures a company’s profitability per share, the P/E ratio compares the market price to that EPS, helping assess valuation.

Both metrics have their limitations, but together they provide investors with insights into stock performance and market expectations.

Summary

EPS gauges profitability per share, and the P/E ratio uses EPS to help determine stock valuation. Both are useful in comparing companies within and across industries.

The Takeaway

Earnings per share (EPS) remains one of the most important metrics for assessing a company’s profitability. It simplifies the income statement into an easily comparable figure.

However, while EPS provides valuable insights, it should be analyzed alongside other metrics for a comprehensive view of a company’s financial health.

In short, use EPS as a starting point in your investment research, but remember to consider broader financial indicators to make well-informed decisions.