Earnings Per Share Formula

If you are a beginner stock investor, planning to make some big bucks, it will take some time before you actually start doing it consistently. There is a lot to learn in stock investing. You need to understand the dynamics of underlying business sectors, which will help you choose the right stocks to invest in. There are many ways in which you can compare stocks available in a single sector. One of the prime parameters used for gauging the value of a stock is the earnings per share (EPS) of any company you are investing in. This ratio is just one of the many factors that you must consider in your stock research. There are other factors like the price/earnings ratio that can be calculated from EPS.

Earnings Per Share - Definition

What influences the performance of a stock? It is obviously the overall performance of the company and the size of profits it is making every quarter. The earnings per share formula links the profit making ability of the company with the stock. Simply put, it is the profit made by the company per every outstanding share issued by it. Outstanding shares are all shares that are in possession of investors, which can be made available for sale in the stock market.

The net income or profit of the company should not include the preferred dividends issued by the company. So the value of preferred dividends needs to be subtracted from net income, before you calculate EPS. The outstanding dividends number keeps on changing and over the course of a year, it may change substantially. So while calculating one needs to take a weighed average amount of shares which can be found in financial statements released by the company you are interested in.

Formula

Once you know the net income of the company, its preferred dividends payment and the total number of outstanding shares of the company, you can use the following formula.

Earnings Per Share for a Stock = (Net Income - Preferred Dividends) / Weighted Average Outstanding Shares

All the information that you need for EPS calculation will be available in the company's current and past balance sheets. Earnings get diluted when the number of outstanding shares of a company increase through conversion from other forms of securities like debentures. Diluted earnings per share value gives you an idea about, how low can the earnings per share drop if all the stocks of the company are converted into outstanding stocks and it is calculated using the same formula as above.

Calculation

Consider that the net income of a company in the year 2009 was $2,000,000, out of which $500,000 was paid out as preferred dividend. If the total weighed average outstanding stocks of the company are 1,000,000, its EPS value will be:

Earnings Per Share = ($2,000,000 - $500,000) / 1,000,000 = $1.5

You cannot rely on the EPS formula purely, to make your stock choice. You need to delve into the company balance sheets more deeply and gauge the liquidity as well as overall financial health, before making a decision. One of the greatest signposts set out for all beginner investors is the book 'Intelligent Investor', by Benjamin Graham, which will guide you on your way to Wall Street success. I wish you all the best with your stock investing endeavors!