What are earnings per share, and how are they calculated

Earnings per share (EPS) is determined by dividing a company's net profit by the total number of outstanding shares. This metric provides insight into the company's profitability on a per-share basis, serving as a key indicator for investors.

Example:
 

• Imagine a company named XYZ Ltd. makes ₹10,00,000 in profit this year. 
• XYZ Ltd has a total of 1,00,000 shares. So, EPS = Profit / Shares = ₹10,00,000 / 1,00,000 = ₹10 per share.

This means if you own 1 share of XYZ Ltd, you earned ₹10 this year.

Why EPS Matters?
 

• Higher EPS = More profit for shareholders.
• Investors compare EPS to decide which stock is better.

Below is a simple table to explain EPS differently:

This table shows how profit and shares affect EPS:
 

This table helps you visualise how EPS changes in relation to profit and shares.

This blog provides a comprehensive explanation of Earnings Per Share (EPS), including its definition, importance, and calculation methodology. An illustrative example using XYZ Ltd. demonstrates how EPS can be utilised to extract essential financial insights. 

The blog emphasises the significance of EPS and the benefits it offers to investors, presenting information in a professional and detailed manner. 

Types of Earnings Per Share (EPS)

Earnings per share, commonly known as EPS, is a financial metric that indicates a company's profit allocated to each outstanding share of its stock. It is important to note that EPS figures can vary, as different types of EPS are calculated for various financial analyses and reporting purposes. 

This article explains:
 

• 6 main types of EPS with simple examples
• How companies calculate them
• Why investors care about different EPS numbers

By the end, you’ll understand how EPS helps measure a company’s financial health.

What Are the Different Types of EPS?

1. Basic EPS

• The simplest form of EPS.
• Formula: (Net Profit - Preferred Dividends) / Total Shares
• Example:
  • Aman Ltd. earns ₹5,00,000 profit.
  • It has 1,00,000 shares.
  • Basic EPS = ₹5,00,000 / 1,00,000 = ₹5 per share.

2. Diluted EPS

• Includes extra shares that could exist (like from employee stock options).
• Formula: (Net Profit - Preferred Dividends) / (Shares + Possible New Shares)
• Example:
  • Aman Ltd. could issue an additional 10,000 shares.
  • Diluted EPS = ₹5,00,000 / (1,00,000 + 10,000) = ₹4.55 per share.

3. Cash EPS

• Measures profit based on actual cash flow (not accounting profits).
• Formula: (Operating Cash Flow - Preferred Dividends) / Shares
• Example:
  • Aman Ltd. has ₹6,00,000 cash profit.
  • Cash EPS = ₹6,00,000 / 1,00,000 = ₹6 per share.

4. Reported EPS (GAAP EPS)

• Official profit number following accounting rules.
• May include one-time gains/losses.
• Example:
  • Aman Ltd. reports ₹5,50,000 profit after selling an asset.
  • Reported EPS = ₹5,50,000 / 1,00,000 = ₹5.50 per share.

5. Trailing EPS

• Based on the last 12 months of earnings.
• Helps see recent performance.
• Example:
  • Aman Ltd.’s last 4 quarters' profits total ₹20,00,000.
  • Trailing EPS = ₹20,00,000 / 1,00,000 = ₹20 per share.

6. Book Value EPS

• Measures profit relative to the company’s book value (net assets).
• Formula: (Net Profit - Preferred Dividends) / Book Value per Share
• Example:
  • Aman Ltd.’s book value is ₹50,00,000.
  • Book Value EPS = ₹5,00,000 / ₹50 = ₹10 per share.
     

EPS Comparison Table

This table shows different EPS types and how they vary:
 

This table helps you compare different EPS calculations for the same company.

EPS is presented in various professional formats, each serving a specific purpose. Basic EPS provides a fundamental measure of performance, while diluted EPS accounts for potential future shares, offering a more comprehensive perspective. 

Trailing EPS reflects historical results, whereas Cash EPS highlights actual cash generation. Investors analyse these metrics collectively to evaluate a company's financial health and strength comprehensively.

How to Calculate Earnings Per Share (EPS)

The profit generated by a business for each share outstanding is denoted as earnings per share (EPS). This metric helps investors assess the viability of investing in a particular stock.

This article explains:
 

• The simple formula to calculate EPS
• A real example with numbers
• Why EPS matters for investors

By the end, you'll know how to find EPS for any company.

The EPS Formula

EPS is calculated using this simple formula:

EPS = (Net Profit - Preferred Dividends) / Total Shares Outstanding

Example: Vijay Ltd.

Let's say:

• Vijay Ltd. made ₹8,00,000 profit this year
• It paid ₹50,000 as dividends to preferred shareholders
• The company has 1,50,000 shares

Calculation:

1. Subtract preferred dividends: ₹8,00,000 - ₹50,000 = ₹7,50,000
2. Divide by total shares: ₹7,50,000 / 1,50,000 shares
3. EPS = ₹5 per share

This means each share earned ₹5 this year.

EPS Calculation Table

This table breaks down the EPS calculation step-by-step:
 

This table shows how each number affects the final EPS calculation.

Vijay Ltd.'s Earnings Per Share (EPS) in our example is ₹5. A higher EPS generally indicates increased profitability and is a critical metric for investors. They rely on EPS to compare companies and make well-informed investment choices with professionalism and confidence.

Conclusion

A straightforward measure of a company's profitability on a per-share basis is its earnings per share (EPS). EPS is calculated by dividing the company's net profit by the total number of outstanding shares, after adjusting for any special dividends or distributions.

A higher EPS indicates greater profitability, which is generally more attractive to investors. Analogous to slicing a pizza, as the number of shares increases, the profit per share decreases. Understanding EPS facilitates more effective comparisons among companies and supports better investment decisions.

However, it is essential to remember that investors rely on a variety of financial metrics and tools to make informed stock selections. 

FAQs

1. Why is EPS essential for investors?

A higher EPS indicates that the company is more profitable, which could result in better returns for shareholders. Investors compare the EPS of different companies to decide which stocks to buy.

2. What’s the difference between Basic EPS and Diluted EPS?

Basic EPS uses only current shares, while Diluted EPS includes extra shares that could come from employee stock options or convertible bonds. Diluted EPS is usually lower.

3. Can EPS be negative?

Yes! If a company loses money (net loss), EPS becomes negative. This means the company isn’t currently profitable.

4. Does a high EPS always mean a good stock?

Not always. A high EPS is good, but you should also check debt, growth, and industry trends. Some companies manipulate EPS, so consider examining other financial metrics as well.

5. How often is EPS calculated?

Companies publish earnings per share (EPS) reports on a quarterly and annual basis. Investors carefully analyse these reports to evaluate whether the company's profits are on the rise or decline.

6. What’s the difference between EPS and dividend per share?

EPS is total profit per share, while dividend per share is the portion of that profit paid to shareholders. A company may have high EPS but pay low dividends.

7. Why does EPS change over time?

EPS changes in response to variations in the company’s profits or share repurchase activities. An increase in the number of shares typically results in a lower EPS, unless profits also increase proportionally.

8. Where can I find a company’s EPS?

Check reputable financial news sources, stock market applications, or the company’s annual report. This information is typically included in the earnings announcements.
 

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