How to Calculate Earnings Per Share

Thorough stock research involves a close scrutiny of a company's balance sheets. The inherent worth of a stock needs to be determined through an analysis of the stock's past performance, the business potential of the company and its future prospects. You need not rely on speculation to buy stocks. A sound intellectual structure that can ascertain the intrinsic value of a stock is needed. One way of ascertaining the performance value of a stock is knowing the Earnings Per Share (EPS) ratio.

Suppose you have narrowed down to one industry sector, in which you would like to pick stocks from. There may be more than one well performing stocks in there, and it can be highly confusing if you rely on speculation to choose one stock investing. The only way to clear the fog of confusion is to light the torch of reason and analyze the company balance sheets with respect to past performance.

Definition

When you make a stock investment, you buy partial ownership in a company. A company issues two types of stocks - common stock and preferred stock, which makes knowing about preferred stock vs common stock important. Earnings per share are calculated with respect to common stock. Stocks that are currently in possession of stock market investors are known as outstanding shares. To put it in simple words, it is the quantum of profit that a company makes for every outstanding share it has issued.

More precisely, EPS is the net income made by any company, after it has been adjusted for paid dividends, for every one of its outstanding shares. Since the number of outstanding shares is a dynamic quantity and therefore, while calculating the earnings per share for a year, you may have to average out the number of outstanding shares. Here's the formula:

Earnings Per Share = (Company's Net Income - Stock Dividends Paid) / Weighted Average Number of Outstanding Shares

Once you understand this formula, used for stock research, half the battle is won. All that remains is to substitute the values of net income, stock dividend value and weighted average number of outstanding shares to get the earnings per share ratio calculated. So, it is essential that you garner all these details from a company's financial statements for previous years. The value you calculate on the basis of past net income, will be known as the trailing EPS value.

How to Calculate Earnings Per Share for Any Stock?

An example of calculating earnings per share will make it easier for you to understand the method. Consider a company which has had a net income of $20,000,000 in one financial year. It must pay $2,000,000 in dividends and the number of its outstanding shares is 6,000,000. So what will be the EPS value for this company? Let us see.

Earnings Per Share = ($20,000,000 - $2,000,000 ) / 6,000,000 = $3

Thus the EPS value would be $3. To calculate diluted earnings value, formula is the same, but you will need an estimate of the number of new outstanding shares that could be introduced from convertibles like stock options and debentures.

Do not rely on the EPS value as the only parameter that influences your decision. Calculate the Price / Earnings ratio and study the liquidity, as well as debt to income ratio of the company and then decide whether buying it would be a worthy investment!