Earnings Per Share (EPS) is a common measurement of a company's profitability, and is considered the most important factor in determining share pricing. EPS is a more accurate measurement of profitability than net income because it also accounts for a company's shareholders. There are a few different ways to calculate EPS, so be sure that you understand how a company determines its EPS before you decide to make an investment.
1. Subtract dividends on preferred stock from the net income of a company to find the numerator in your equation. Do not include common stock in this step. Preferred dividends are accrued on preferred shares and take precedence over common dividends.They also pay higher dividends than common shares. For example, if a company's net income is $250,000 with $30,000 in dividends, the numerator in the equation is $220,000.
2. Calculate the average number of outstanding shares to determine the denominator for the equation. There are a couple ways to do this. The most common calculation is known as diluted EPS. This figure includes all of the common stocks as well as other options, bonds and warrants that have not yet been issued, which makes it a conservative estimation. To calculate diluted EPS, add up the number of outstanding shares as well as unissued common stock equivalents. Non-diluted EPS only uses the number of outstanding shares. For example, if a company has 4 million common shares, 100,000 vested options, 20,000 convertible bonds and 40,000 warrants, the denominator in the equation will be 4.16 million for a diluted EPS, or 4 million for nondiluted EPS.
3. Divide the numerator by the denominator. To continue the examples, the diluted EPS will be 220,000 divided by 4.16 million, or .052 per share. The nondiluted EPS would be 220,000 divided by 4 million or .055 per share.
- Always use EPS figures in conjunction with other measures of profitability, such as P/E, or price/earnigs ratio, which measures a company's value in the market as well as its earnings.
- Spencer Platt/Getty Images News/Getty Images