The financial ratio earnings per share, or EPS, is perhaps the single most popular variable used by analysts and investors to evaluate the profitability of a company. EPS measures the profitability of a company on a per share basis.
Calculation
Earnings per Share = (Net Income - Preferred Dividends) / Shares Outstanding
Explanation
A profitability ratio, earnings per share provides the investor with a measure of the profits of a company, as generated for each share of common stock outstanding. Since the number of shares outstanding can change over time, the metric typically uses a weighted average value.
There are several variations on the earnings per share calculation, including:
Diluted EPS: which uses the outstanding shares plus convertibles or warrants outstanding
Trailing EPS: which uses last year's earnings and common shares (the actual EPS reported in financial statements)
Current EPS: which uses the current year's projected earnings
Forward EPS: which is typically based on analysts' projections for a future year
Example
Company A's income statement indicated net income of $4,283,000, and no payment of preferred dividends. The weighted average number of common shares outstanding for this same time period was 706,766. The trailing EPS for Company A would be:
The financial accounting term net Income is used to describe a measure of a company's profitability. Net income is a line item appearing on the income statement, and is derived by subtracting expenses from revenues.
The financial accounting term retained earnings is used to describe the portion of net income that is not distributed to common or preferred stockholders in the form of dividends, and is held by the company for future use. Retained earnings appear in the owner's equity section of the company's balance sheet.
The financial ratio fully diluted earnings per share allows the investor to understand the impact to earnings per share if all of the investors holding securities convertible to common stock were to exercise that right.
The financial accounting term statement of retained earnings refers to a financial report used by companies to reconcile the starting and ending balance of retained earnings. Typical line items in this statement would include operating loss or profit, dividends, and any redemption of common stock.
The term diluted earnings per share refers to a hypothetical calculation that assumes all dilutive securities were converted to common stock. The dilutive earnings per share calculation involves adjustments to earnings of the company as well as the number of shares outstanding. Examples of dilutive securities include convertible bonds and preferred stock, warrants and stock options.