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 show the company’s profitability status. 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.
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What is meant by earning per share formulas?
Earnings per share is basically a financial ratio where a company divides its net earnings which is for the shareholders by outstanding shares all over a certain time. The formula of calculating earnings per share shows the ability of the company to generate net profits for shareholders.
The single value of earnings per share for one company is arbitrary. It becomes more useful when it is compared and analyzed against other companies in that industry. And also compared with the market share price of the company. In the case of two companies in the same industry and also having the same number of shares, earnings per share is used to check the profitability as the higher the earnings per share ratio the more the profitability of the company. Earnings per share are used to determine if the share price of the company is relatively cheaper with a lower price-to-earnings ratio or expensive with a higher price-to-earnings ratio.
Uses of Earnings Per Share (EPS) formulas
Earnings per share formulas are the easy way to calculate earnings per share with the help of net income, preference dividend, and outstanding shares. It is used in many calculations of financial ratios. These ratios are price to earnings valuation ratio and return on equity ratio. With the help of the earnings per share ratio, we can easily understand the financial position of the company. Higher the earnings per share ratio more the profitability of the company.
In simple words, the earnings per share formula shows the financial strength of the company by showing its profitability nature. Further, this also helps industries to make good investments and good earnings per share ratio attract several good investors towards the company.
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.
In the first formula, a total number of outstanding shares are used in the calculations of earnings per share. But in the real world, analysts used weighted average outstanding shares as the denominator in calculations. But the number of outstanding shares changes with the time factor, so they preferred to use outstanding shares at the end of the year.
Sometimes, diluted earnings per share are also mentioned in the financial reports of the company. Diluted earnings per share also include options, warrants, and convertible bonds which can affect the number of total outstanding shares whenever exercised by the company.
There is one more type of earnings per share which is adjusted earnings per share. In this non-core profits and losses and also the minority interests are not included while calculating for earning per share. The basic focus of this method is to calculate the profit generated only from the core operations of the company in normal circumstances.
Net income
Net Income is one of the major factors which is used in calculating the value of earnings per share. In simple words, net income is the left-over profits of the company after deducting for the expenses incurred. Sometimes it may be losses, it is not mandatory to have profits always. This information can be found within 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 calculate earnings per share without using the number of outstanding shares. Most of the time, the stock of common shares is used in calculations. It is another type of stock with the company. Many companies preferred to issue more shares of common stock as these are more expensive than preference shares. Outstanding shares include those shares which are brought by the shareholders. Therefore, common outstanding stock refers to the stock of outstanding shares that are purchased by the shareholders.
Shares issued and shares outstanding are two concepts that are a little confusing. Share issued means the total number of shares that are offered for sale by the company whereas the outstanding stocks include the number of shares that are held by the shareholders of the company.
We have to use little effort to find out the number of outstanding shares. By using the information which is mentioned in the balance sheet in the shareholder’s equity section. In the balance sheet, it is mentioned that amount received by the company from the sale of its common shares and the price at which it is sold. By dividing the total amount received by the cost per share, we can easily get the number of outstanding shares.
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.
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Conclusion
Earnings Per Share (EPS) formula is a valuable metric for evaluating a company’s profitability and financial health. By calculating EPS, investors gain insight into the company’s ability to generate returns for its shareholders and assess its stock value compared to others in the market.
A higher EPS typically reflects a stronger, more profitable company, making it a key factor in investment decisions.
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.
