EPS : A parameter for measuring company’s profitability
Earnings per share (EPS) is referred to that part of company’s profit which is distributed to each outstanding equity share. One of the most used financial terms; it is put into use to measure the profitability of company.
The term gives best results when employed in comparison of companies from same sector. EPS, when calculated over a number of years gives a fair idea, if the company’s profit and earnings increased over the period in time, remained static or reduced.
A company with high EPS is generally regarded as profitable although there are many other factors too which are needed to be taken into account before declaring its actual profitability.
Earnings per share = (Net Profit after Taxes – Preference Dividends) / Number of Equity Shares
If the number of shares changes or capital structure of a company changes due to diluted earnings during the reporting period the below given formula is used.
Earnings per share = Net Income / weighted average outstanding shares
For instance, company ABC has 200,000 outstanding shares for 8 months and as new shares is issued, has 220,000 outstanding shares for the remaining 4 months. The weight for 200,000 would be calculated as 8/12 = 0.67 and the weight for 220,000 shares would be 4/12 = 0.34.
Now, the weighted average would be:
0.67*200,000+0.34*220,000 = 134000+74800 =208,800
Different types of EPS:
- Trailing EPS (diluted or basic)
- Current EPS (diluted or basic)
- Forward EPS( diluted or basic)
- Trailing earnings are referred to the previous year end earnings.
- Current earnings are referred to the current year earnings
- Forward Earnings are referred to the future earnings (pure estimates).
Basic EPS is the number of shares that can be traded in the market currently. The number calculated using this way leaves out any potential dilution coming out from outstanding dilutive securities.
Diluted EPS reflects the potential dilution from dilutive securities —– options, warrants, convertible bonds, or convertible preferred stock.
*As per the general observation any two companies may have same EPS with different number of shares outstanding. The reason may be that one of the companies makes use of its capital to generate profits in a better way than what the other does.