Earnings per share (EPS) is one of the most important indicators for investors and analysts to assess a company’s financial health and analyze its performance. It serves as an essential tool that helps understand the profitability of a company on a per-share basis. In this article, we will explore the concept of EPS and walk you through the steps to calculate it.

1.Understanding Earnings Per Share

EPS is derived by dividing a company’s net income (earnings) by the number of outstanding shares. It basically represents the portion of profit allocated to each outstanding share in a given fiscal period. Higher EPS could signify higher profitability and often leads to an increase in the stock price due to increased demand among investors.

There are two types of EPS calculations – Basic EPS and Diluted EPS:

– Basic EPS: This calculation only considers outstanding common shares, ignoring any potential dilution caused by stock options, convertible securities, or other factors.

– Diluted EPS: This calculation factors in all potential dilution effects including stock options, convertible bonds, and other convertible securities that may increase the total number of outstanding shares.

2.Steps to Calculate Basic Earnings Per Share

To calculate Basic EPS, use the following formula:

Basic EPS = (Net Income – Preferred Dividends) / Weighted Average Outstanding Shares

Here’s a step-by-step guide to calculating Basic EPS:

Step 1: Find Net Income

Net income can be obtained from the company’s income statement.

Step 2: Subtract Preferred Dividends

Subtract the preferred dividends from net income if there are any. These are typically paid out before common shareholders receive their dividends.

Step 3: Determine Weighted Average Outstanding Shares

Calculate the weighted average number of outstanding shares during the period using them following formula:

Weighted Average Outstanding Shares = (Beginning Outstanding Shares + Ending Outstanding Shares) / 2

Step 4: Divide the Adjusted Net Income by Outstanding Shares

Now, divide the net income minus the preferred dividends by the weighted average outstanding shares to get the Basic EPS.

3.Steps to Calculate Diluted Earnings Per Share

To calculate Diluted EPS, use the following formula:

Diluted EPS = (Adjusted Net Income) / (Weighted Average Outstanding Shares + Additional Dilutive Shares)

Here’s a step-by-step guide to calculating Diluted EPS:

Step 1: Calculate Adjusted Net Income

Adjusted net income is calculated similarly to Step 2 in Basic EPS calculation. Subtract any preferred dividends from net income.

Step 2: Determine Additional Dilutive Shares

Find out any additional shares that may be issued due to stock options, convertible bonds, or other convertible securities.

Step 3: Combine Weighted Average Outstanding Shares and Additional Dilutive Shares

Add the weighted average outstanding shares and additional dilutive shares calculated in steps above.

Step 4: Divide the Adjusted Net Income by Total Shares

Divide the adjusted net income by the total shares from Step 3 to get the Diluted EPS value.

In conclusion, calculating earnings per share can provide important insights into a company’s profitability and investment potential. By understanding both Basic and Diluted EPS, investors can make more informed decisions about their investment portfolios and strategies.