Earnings per Share (EPS)

Earnings per Share (EPS) of a business is the portion of its net income of a period that can be attributed to each share of its common stock. Earnings per share can be calculated by dividing net income of a period by the number of common shares outstanding during the period. Companies are required to show EPS with their income statement.

While comparing the profitability of stocks, their prices and the total earnings of the respective companies do not help because we need to compare apples to apples. Therefore we calculate the earnings per share of the stocks. But EPS still is not much helpful if compared directly. It is used to calculate the price/earnings ratio of a stock which is directly compared with the price/earnings ratio of other stocks.

Formula

The formula to calculate earnings per share is:

Earnings per Share (EPS) = Net Income − Dividends on Preferred Shares
Weighted Average Number of Common Shares Outstanding

Earnings per share is calculated on annual basis i.e. annual net income and preferred stock dividends are used in the formulas. The use of weighted average common shares outstanding delivers accurate result however, just a simple average, or the number of common share outstanding at the end of the year can also be used instead of weighted average figure for simplicity.

Example

Company A paid dividend of $235,100 during the year ended December 31, 2010 and its weighted average common shares outstanding were 200,000 during the year. There were no preferred stock outstanding and preferred stock dividend. Calculate the EPS of company A.

Solution
EPS = ( $235,100 − 0 ) / 200,000 ≈ $1.18

Written by Irfanullah Jan