What is Earnings Per Share? A Step by Step Guide on How to Calculate Earnings Per Share
As you start investing, you may need to carry out research to determine the best company to invest with. After investing for a long, you may even own your company that other investors could consider investing in. As investors invest in your company, you always expect to earn from the shares they buy and trade. To assess your company to know if you are making a profit, you need to understand how to calculate the earnings per share. If you have been on the lookout for how you can calculate and determine your company’s worthiness, here is a guide for you.
What is Earnings Per Share?
We can define Earnings Per Share (EPS) as a figure that indicates the company’s profit per a unique share of stock. The Earnings Per Share can be calculated on a quarterly basis or an annual basis. In other words, we can understand Earnings Per Share as the amount of money every share of the stock will be given if the earned profits were to be shared to the shares that are outstanding at the end of the year.
Earnings Per Share is an important figure that is used to gauge the worthiness of the specified company on a shareholder basis. Earnings Per Share can also be used to make a comparison between a bigger company and a smaller company. The Earnings Per Share is also a tool many investors use to gauge whether a company is worth investing in or not.
Types of Earnings Per Share
Based on where the figures come from, we can classify Earnings Per Share in three broad categories. They include;
Current Earnings Per Share
The current Earnings Per Share is derived from the numbers from the current year and the projections made. To get the current Earnings Per Share, you need to pick the figures drawn from the four quarters of the current fiscal year. You should draw the figures from the quarters that have already passed and use projections for the coming quarters.
Forward Earnings Per Share
This is the Earnings Per Share figure that is based on projections purely. If you are the owner of a company, you can use analysis the make projections and use the projected figures to calculate the forward Earnings Per Share. This will tell the potential of the specified company.
Trailing Earnings Per Share
The trailing Earnings Per Share is calculated from the figures drawn from the previous year. Here, you need to get the profits made throughout the previous year’s four quarters to get the Earnings Per Share of the said company. This is the most accurate Earnings Per Share as it uses actual figures without employing the projected figures.
Because of the effectiveness of Earnings Per Share, we need to learn how to calculate it from different dimensions. Here is how;
How to Calculate Earnings Per Share
Calculating your company’s Earnings Per Share is simple after you have set all the required parameters. For instance, if our company owns 1000 shares and earns $10000, its Earnings Per Share will be $10 per share. You need to first subtract the dividends from the net income or the earned profit before calculating the Earnings Per Share.
For you to calculate the Earnings Per Share, you need to get the difference between the net income of your company and the preferred dividends that your company pays, if any, then divide the difference by the weighted average common shares outstanding.
Before you can apply the formula for calculating Earnings Per Share, here are some of the steps that you need to follow.
Steps involved in Calculating the Basic Earnings Per Share
Determine the Net Income of the Company from the Previous Year
This is the primary way to determine the Earnings Per Share of your company. If you don’t own a company, but you want to determine the Earnings Per Share for the company you need to invest in, you can visit their website to get the calculated net income. You need to be careful to be the annual net income and not the quarterly to get the right Earnings Per Share.
Define the of Outstanding Shares
These are the number of shares a company has and are available on the stock exchange. If you own a company, you need to have such information for public viewing. This will make your website trustable and allow for easy investment.
Take the Number of Shares and Divide by the Company’s Net Income
This is the step that will give you the basic earnings per share. You need to take the number of outstanding shares and divide them by the net income for the last year.
For instance, if a company’s net income from 2021 is $5 billion with outstanding shares amounting to $1 billion, then the basic Earnings Per Share is 5.
Steps involved in Calculating the Weighted Earnings Per Share
The weighted Earnings Per Share is a more accurate way of determining the profitability of a specified company. This is because it involves the company’s dividends (preferred stocks) that it can issue to the stakeholders. We can understand dividends as the amount of money that a company pays its stakeholders from the realized profits that are paid on a quarterly basis.
To get the weighted Earnings Per Share;
· Evaluate the dividends on the preferred stock
· Get the annual income/profits and have the dividends subtracted from it
· Divide the answer with the number of outstanding shares
For instance, if a company’s net income for 2020 is $15 billion, and they pay their stakeholders dividends worth $2 billion for the whole year with 4 billion shares outstanding, then;
The Weighted Earnings Per Share= $15 Billion - $2 Billion divided by 4 Billion, which will translate to Earnings Per Share of 3.25
What do the Earnings Per Share Translate to?
Earnings Per Share signifies the profitability of the specified company. It is also a figure that you can use to assess the value and performance of the said company. But what do the figures you get as Earnings Per Share translate to?
· The higher the Earnings Per Share value, the higher the payout and vice versa
· You can use the Earnings Per Share value to determine the company’s stock value
· Earnings Per Share can be used to compare companies
· Earnings Per Share can be used to foretell the profitability future of the company.
Limitations of Earnings Per Share
Depending on the type of Earnings Per Share you are using, they all come with specific drawbacks. If you make use of the Earnings Per Share from the previous year, you may suffer a setback from the changing market trends. The projections also may not provide the real market trends in the future.
There may be changes in the accounting policy that may affect the company’s Earnings Per Share that will also affect your earning.
Earnings Per Share plays a key role in determining whether your company or the company you want to invest in is profitable or not. The Earnings Per Share is also important when you want to determine the PE ratio in evaluating the metric of stocks. Always go for the company with a high Earnings Per Share value as an assurance that you will get your dividends after investing with such a company.