Earnings per share is the amount paid to shareholders for each share they own. This is a key component of financial metrics used in business. Investors typically use this to calculate the worth of a company’s shares and compare it to the market price.
Earnings per share indicate the profitability of a corporation. The higher the earnings per share, the greater the profitability of the firm. This also draws numerous fresh and beneficial investments to the organization.
It is one of the most effective indicators for determining the financial soundness and stock value of a firm. We at OnDemand International are here to provide you with a full overview of the earnings per share formulae used in this article.
What you mean by Earning Per Share?
Earnings per share is a financial measure that divides a company’s net earnings for shareholders by the number of outstanding shares during a given period of time. The formula for calculating earnings per share demonstrates the company’s potential to create net profits for shareholders.
The value of earnings per share for a particular corporation is arbitrary. It becomes more beneficial when compared and examined against other firms in the same sector. Also, compare the company’s market share price. In the event of two firms in the same industry with the same number of shares, profits per share is used to determine profitability since the higher the earnings per share ratio, the greater the company’s profitability. Earnings per share are used to assess if the company’s share price is comparatively cheap (lower price-to-earnings ratio) or costly (higher price-to-earnings ratio).
Uses of Earnings Per Share (EPS) formulas
Earnings per share formula provide an easy approach to determine earnings per share using net income, preference dividends, and outstanding shares. It is used to calculate a variety of financial ratios. These two ratios are the price to earnings valuation ratio and the return on equity ratio. The earnings per share ratio allows us to clearly assess the company’s financial status. The higher the profits per share ratio, the greater the profitability of the firm.
To put it simply, the earnings per share formula demonstrates the company’s financial health by indicating its profitability. Furthermore, this helps industries make smart investments, and a high profits per share ratio attracts a large number of good investors.
Earnings Per Share Formulas
Earnings per share can be calculated in a number of ways. There are two basic formulas for calculating earnings per share known as basic earnings per share and weighted earnings per share. These formulas are given below-
- Earnings per share = (Net Income-preference dividend)/ shares outstanding at the end of the year.
- Earnings per share = (net income-preference dividend) / weighted average of outstanding shares.
The first formula uses the total number of outstanding shares to calculate earnings per share. However, in the actual world, analysts utilized the weighted average outstanding shares as the denominator in computations. However, the number of outstanding shares fluctuates throughout time, thus they decided to utilize outstanding shares at the end of the year.
Sometimes diluted profits per share are indicated in the company’s financial filings. Diluted profits per share also include options, warrants, and convertible bonds, which can influence the total number of outstanding shares if exercised by the corporation.
There is one additional sort of earnings per share: adjusted earnings per share. Non-core income and losses, as well as minority interests, are excluded from the calculation of earnings per share. The fundamental goal of this strategy is to determine the profit earned just from the company’s core operations under normal conditions.
Net income
Net income is a crucial aspect in determining the value of earnings per share. To put it simply, net income is the company’s remaining earnings after subtracting its costs. It is not necessary to have profits at all times; losses are possible. This information may be found in the company’s income statement.
Preference dividend
Preference dividend is the second most important component used for calculating earnings per share. Firstly, dividends are that portion of the profits given to shareholders whereas preference dividend is that portion of the profit that is given to the preference shareholders. Preference dividend is shown in the retained earnings statement of income statement of the company.
Outstanding shares
We cannot compute earnings per share without taking into account the number of outstanding shares. Calculations are typically based on the stock of common shares. It is another sort of equity in the firm. Many corporations wanted to issue more common stock since it is more expensive than preference shares. Outstanding shares are those brought by shareholders. Thus, common outstanding stock refers to the stock of outstanding shares acquired by shareholders.
Shares issued and outstanding are two concepts that might be difficult to understand. The term “share issued” refers to the total number of shares that the firm offers for sale, whereas “outstanding stocks” refers to the number of shares that the company’s stockholders possess.
Finding out the number of outstanding shares requires minimal effort. Using the information from the balance sheet in the shareholder’s equity column. The balance sheet shows the amount collected by the corporation from the sale of its common shares, as well as the price at which they were sold. To calculate the number of outstanding shares, divide the total money received by the cost per share.
Example of earnings per share formula
XYZ Ltd. has a net income of ₹1 million in the fourth quarter. The total number of outstanding shares is 11,000,000. He announces the preference dividend of ₹ 250,000.
The earnings per share of XYZ ltd. Will be:
EPS= (₹1,000,000 – ₹250,000)/ 11,000,000
EPS= ₹ 0.068
Therefore, the earnings per share of each share are ₹0.068. Shareholders will receive ₹0.068 for each of its holdings.
Read Difference: Difference Between Bookkeeping and Accounting
FAQ’s
Many internal shares impact the earnings per share. But some of them directly impact profits, preference dividends, outstanding shares. These are buyback of shares, splits, mergers, restructuring, acquisitions, and accounting policies.
Earnings per share can be manipulated either by adjusting the net income of the company or by adjusting the total number of outstanding shares of the company.
Negative earnings per share mean that the company is spending more than it has earned. That simply means the company is losing money. Negative earnings per share do not necessarily mean that stock must be sold.
There are mainly five types of earnings per share. These are reported earnings per share, GAAP earnings per share, ongoing earnings per share, pro forma earnings per share, and retained earnings per share.
Earnings per share are one of the most significant factors which help in determining the share price of the company. Higher earnings per share mean higher profits of the company, and it has more profits for distributing to shareholders.
