Earnings per share (EPS) is a financial measurement used by investors, accountants, analysts and others when reviewing and assessing corporate information. EPS can be calculated in several ways including the 1) basic EPS, 2) average EPS, 3) weighted average EPS and 4) Diluted EPS. The earnings per share metric illustrates how much income is retained by a company after expenses and cash out flow and as a proportion of shares outstanding. Naturally, the higher this number is the better it is for investors.
Calculating earnings per share is fairly simple, however the accuracy and type of EPS measurement should be paid attention to when making financial decisions. For example, comparing a diluted EPS to a basic EPS is like comparing Florida Oranges to California Lemons. They may have similarities, but reflect different financial scenarios and should not be considered the same when determining earnings patterns over time.
EPS calculations
Basic earnings per share: To calculate earnings per share divide net income by shares outstanding. For example $1,000,000/10,000=$100/share.
• Diluted earnings per share
If company A has additional financial securities outstanding such as debt that can be converted into shares or un-exercised employee stock options to calculate earnings per share is to incorporate all possible shares that could become part of the total share float. This method is called diluted earnings per share and does not necessarily include shares held by a company but not issued to employees, other businesses or the public.
To further illustrate, if company A above has an additional $1,000,000 in convertible bonds and the price per share is $24.00 then the $1,000,000/$24=41,667 shares. So, if the convertible bonds are converted into equity, another word for shares, then the total shares outstanding are 51,667 making the new earnings per share $19.35/share.
• Average and weighted average earnings per share
A third way to calculate earnings per share is to use an average amount of shares outstanding with or without dilution. Every day the securities markets are open shares have the potential to change ownership, be bought back by the company, converted, re-issued etc. This can change the total number of shares outstanding. To include these fluctuations in earnings per share calculates, an average of shares outstanding is used.
Averaged shares outstanding can be calculated using a regular average or a weighted average. A regular average simply takes the number of shares outstanding for multiple periods, adds them up, and then divides the total number of shares by the number of time periods. For example, a 3 day average shares outstanding is 110 if day 1 ends with 100 shares outstanding, day 2 ends with 110, and day 3 ends with 120. 330/3=110.
If a weighted average is used instead of a regular average, the amount of time in which an average or specific amount of shares outstanding exist is used in proportion to one or more other time periods with a different amount of shares outstanding. For example, for Q1 average shares outstanding are 110, Q2+Q3 average shares are 125 and Q4 average shares are 130.
Since the periods are comprised of 3 sections and the 2nd consists of 2 periods the time proportions are 25%, 50% and 25%. Such being the case, 25% x 110=27.5 shares outstanding, 50% x 125=62.5 shares outstanding and 25% x 130=32.5 shares outstanding for a total weighted average shares outstanding of 122.5.
Summary
Earnings per share is a measurement of shareholder wealth. EPS is commonly used as an investment indicator, metric and benchmark with which corporate performance is assessed. Since earnings per share can be calculated in different ways, it is important to 1) be aware of the various calculation methods, 2) what they represent, and 3) how it can be used.
Earnings per share calculations can be charted over time for technical analysis, or can be used as an indicator of corporate performance in a given financial period. Analyst estimates of EPS are often used when determining if a company has performed up to, at par with or below financial expectations.
Calculating earnings per share is fairly simple, however the accuracy and type of EPS measurement should be paid attention to when making financial decisions. For example, comparing a diluted EPS to a basic EPS is like comparing Florida Oranges to California Lemons. They may have similarities, but reflect different financial scenarios and should not be considered the same when determining earnings patterns over time.
EPS calculations
Basic earnings per share: To calculate earnings per share divide net income by shares outstanding. For example $1,000,000/10,000=$100/share.
• Diluted earnings per share
If company A has additional financial securities outstanding such as debt that can be converted into shares or un-exercised employee stock options to calculate earnings per share is to incorporate all possible shares that could become part of the total share float. This method is called diluted earnings per share and does not necessarily include shares held by a company but not issued to employees, other businesses or the public.
To further illustrate, if company A above has an additional $1,000,000 in convertible bonds and the price per share is $24.00 then the $1,000,000/$24=41,667 shares. So, if the convertible bonds are converted into equity, another word for shares, then the total shares outstanding are 51,667 making the new earnings per share $19.35/share.
• Average and weighted average earnings per share
A third way to calculate earnings per share is to use an average amount of shares outstanding with or without dilution. Every day the securities markets are open shares have the potential to change ownership, be bought back by the company, converted, re-issued etc. This can change the total number of shares outstanding. To include these fluctuations in earnings per share calculates, an average of shares outstanding is used.
Averaged shares outstanding can be calculated using a regular average or a weighted average. A regular average simply takes the number of shares outstanding for multiple periods, adds them up, and then divides the total number of shares by the number of time periods. For example, a 3 day average shares outstanding is 110 if day 1 ends with 100 shares outstanding, day 2 ends with 110, and day 3 ends with 120. 330/3=110.
If a weighted average is used instead of a regular average, the amount of time in which an average or specific amount of shares outstanding exist is used in proportion to one or more other time periods with a different amount of shares outstanding. For example, for Q1 average shares outstanding are 110, Q2+Q3 average shares are 125 and Q4 average shares are 130.
Since the periods are comprised of 3 sections and the 2nd consists of 2 periods the time proportions are 25%, 50% and 25%. Such being the case, 25% x 110=27.5 shares outstanding, 50% x 125=62.5 shares outstanding and 25% x 130=32.5 shares outstanding for a total weighted average shares outstanding of 122.5.
Summary
Earnings per share is a measurement of shareholder wealth. EPS is commonly used as an investment indicator, metric and benchmark with which corporate performance is assessed. Since earnings per share can be calculated in different ways, it is important to 1) be aware of the various calculation methods, 2) what they represent, and 3) how it can be used.
Earnings per share calculations can be charted over time for technical analysis, or can be used as an indicator of corporate performance in a given financial period. Analyst estimates of EPS are often used when determining if a company has performed up to, at par with or below financial expectations.
Source: http://www.investopedia.com
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