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| Earnings Per Share (EPS) |
What it is:
The term earnings per share (EPS) represents the portion of a company's
earnings, net of taxes and preferred stock dividends, that is allocated to each
share of common stock. The figure can be calculated simply by dividing net
income earned in a given reporting period (usually quarterly or annually) by the
total number of shares outstanding during the same term. Because the number of
shares outstanding can fluctuate, a weighted average is typically used.
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How it Works/Example:
Let's assume that during the fourth quarter, XYZ Corp. reported net income
available to common shareholders of $4 million. Over the same time frame, the
company had a total of 10 million shares outstanding. In this particular case,
the company's quarterly earnings per share (or EPS) would amount to $0.40,
calculated as follows:
$4 million in earnings divided by 10 million shares = EPS of $0.40
EPS is a carefully scrutinized metric that is often used as a barometer to gauge
a company's profitability per unit of shareholder ownership. As such, EPS is a
key driver of share prices. It is also used as the denominator in the frequently
cited P/E ratio.
EPS can be calculated via two different methods: basic and fully diluted. Fully diluted EPS -- which factors in the potentially dilutive effects of warrants, stock options, and securities convertible into common stock -- is generally viewed as a more accurate measure and is more commonly cited.
EPS can be further subdivided according
to the time period involved. Profitability can be assessed by prior (trailing)
earnings, recent (current) earnings, or projected future (forward) earnings.
Though EPS is widely considered to be the most popular method of quantifying a
firm's profitability, it's important to remember that earnings themselves can
often be susceptible to manipulation, accounting changes, and restatements. For
that reason, free cash flow is seen by some to be a much more reliable indicator
than EPS. Nevertheless, EPS remains the industry standard in determining
corporate profitability for shareholders.
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