When researching an investment, one of the most important metrics of a company's performance is earnings per share. The EPS gives a general idea of how the company is doing, compared to competitors as well as its past performance. You need access to a few vital statistics in order to calculate earnings per share; you can also compute this number before and after required cash payments for taxes, interest and dividends.
1. Calculate the gross earnings by adding all compensation, fees, sales and earned interest. Subtract overhead and expenses for plant, equipment, wages and material. The result is net earnings before obligations such as taxes, preferred dividends and interest payments.
2. Divide the result by the number of shares outstanding. A common method is to use the "weighted" share number, which uses the number of shares outstanding in each of the year's twelve months. If the firm had 100,000 shares out over a period of eight months, for example, you would multiply 100,000 times 8/12. If the company issues more stock and over the remaining four months there were 120,000 shares, you then multiply 120,000 times 4/12. Add the two results; the number you arrive at is the weighted number of shares.
3. Use the gross earnings number to calculate the earnings after obligatory cash outlays. These include dividends on preferred shares of stock, which must be paid regardless of the company's performance. Subtract preferred dividends, tax payments and interest paid on bonds and other obligations. Divide the number you arrive at by the weighted shares outstanding.
4. Compare earnings "before" and "after" cash obligations. The "before" number gives a clearer picture of how much money the company is earning from its ongoing operations. The "after" number is the result that takes into consideration expenses outside of operations. When comparing earnings figures from two different companies, make sure you are comparing the same EPS figure; otherwise the comparison is inaccurate.
- Earnings "before" is also abbreviated EBITD. The dividend figure includes both preferred dividends and those declared and paid on common stock. EBITDA adds amortization (principal) expense of any loans the company is repaying.
- Depreciation is not figured into EPS, as it is not an expense that is paid out in cash.
- Don't rely on EPS alone to decide on a stock trade. Consider the market and business environment, competing companies, alternative investments, and the direction of earnings per share of the company you're studying to make a full evaluation.
Items you will need
- Income Statement, Quarterly or Annual
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