HomeProductsAccountingWhat is EPS (Earning per Share)? | Definition, Types, Formula, and Factors

What is EPS (Earning per Share)? | Definition, Types, Formula, and Factors

In determining the value of an investment, potential investors must conduct a ratio analysis. EPS (Earnings Per Share) is one example of a useful ratio analysis, which shows a company’s efficiency in making a profit from its business ventures. To manage everything about the company’s finances, you can use financial ERP software that helps in configuring the structure, needs, and objectives of the company.

The value of EPS gives a clear overview of the company’s financial performance. In addition, Earning per share becomes a reference for investors to lower or increase the value of their investments.

Earning per share shows a company’s profitability by showing how much money a business makes for each of its shares. Eps figures are determined by dividing a company’s net income by outstanding common shares. However, the higher the EPS figure, the more profitable the company.

EPS

The Definition of EPS

What is EPS (Earning per share)

Earnings per share (EPS) is a calculation of how much profit a company produces per share based on the average number of outstanding shares. In other words, if all profits were allocated to outstanding shareholders at the end of the year, each share of stock would get this amount of money.

EPS is a metric that investors use to estimate the worth of stock. If a company’s earnings per share are high, each share has a greater chance of generating profits for investors. It also means that a corporation is profiting from the money it receives from investors.

A large company’s profits per share cannot be compared to a small company’s profits per share. A larger company will have to split its earnings amongst many more shares of stockholders compared to a smaller company.

As the number of shares outstanding changes over time, the ratio uses a weighted average number of shares. This removes uncertainty and provides a more accurate picture of a stock’s profitability over time.

Also Read: Financial Administration Helps Improve Your Company’s Functionality!

Types of Earning Per Share

In order to make better investment decisions, many investors will compare all these three types of EPS:

Trailing EPS

The Trailing EPS calculations use data from the prior year. The earnings per share calculation use earnings from the previous four quarters. Because it is based on real statistics, trailing EPS is used by the majority of stock market valuations. However, investors may not pay much attention to trailing EPS because it does not forecast future EPS values.

Current EPS

Current earnings per share are based on current-year statistics that include predictions. This calculation is based on data from the current financial year’s four quarters. Some quarters have simply gone, resulting in actual data, while others are still forecasts.

Forward EPS

Forward EPS is measured using estimated future statistics. Consultants or the company itself frequently provide forward projections for investors interested in the company’s earning potential.

EPS formula

  • Basic Earning Per Share – (Net income – Preference dividend) / Weighted average no of share outstanding
  • Diluted Earning Per Share–  {Net income – preference dividend (which are not convertible) + Interest on debenture (if such debenture is convertible)} / (Weighted average no of share outstanding + conversion of diluted securities)
  • Cash Earning Per Share–  (Operating cash flow / Diluted shares outstanding)

How to Calculate Earnings per Share

There are various methods for calculating earnings per share. Here are two versions of the earnings per share formula:

EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding

EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding

The first method calculates EPS using total outstanding shares. Although in practice, analysts may use weighted average shares outstanding when computing the denominator. Analysts mostly use last period shares outstanding, since outstanding shares might change over time.

Diluted EPS is also frequently mentioned in financial statements. Diluted EPS includes outstanding options and adjustable instruments, which might affect total shares outstanding if exercised.

Adjusted EPS is another kind of earnings per share method. This eliminates all non-core income and losses, as well as those in minority shares. The goal of this method is to show the normalized profit or loss from core operations.

Also Read: Retained Earnings: How to Calculate and Make a Report

Factors Affecting Earning per Share

Factors Affecting Earning per Share

EPS Increase Factor

There are many factors that cause the value of earnings per share of the company to increase. Some of them are:

  • When a company’s earnings improve, so does its EPS.
  • Earnings per share increases as the number of shares decreases due to a repurchase.
  • The company’s net income and the number of shares have decreased.
  • Net income is rising and the number of common shares is stagnant.
  • The number of profits and the number of shares decreased.
  • The percentage value of the decline in the number of shares turned out to be greater than the decrease in net income.
  • The percentage value of the increase in net income is greater than the percentage increase in the number of shares.

EPS Decrease Factor

On the other hand, there are also several factors that influence the decrease in the value of earnings per share in a company, such as:

  • Net income is declining while the number of shares distributed is stagnant.
  • Net income is stagnant and the number of common shares is increasing.
  • The number of ordinary shares outstanding has increased, which is more than the growth in net income.
  • The percentage loss in net income increases rather than the percentage decrease in the number of shares.

In addition, companies will definitely need ERP software that is able to integrate every business activity, so that every department in the company can need the information they need.

Conclusion

EPS

The majority of businessmen consider EPS as an important aspect, to measure the profitability or strength of the company. As an entrepreneur, you also have to learn how to manage your finances effectively.

With the demands of the industrial world, every open company strives to continuously increase its EPS. Because the financial aspect becomes an important point for investors when going to invest.

To make it easier for you to manage business finances, then you can use Accounting Software from HashMicro, to record business bookkeeping.

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