Earnings per share are known by calculating a company’s net income by allocating it to each outstanding share of common stock. The results of the calculation will indicate how profitable the company is.
Clearly, the higher the EPS, the better the company’s profitability; with the right formula, you will know your profits for each of the shares you own, and it works as a metric to estimate the corporate value.
To know your profitability, you need to calculate the earnings value of your net income by dividing it by the claims that are available in the company. The calculation can be done in two ways, using the weighted earnings per share equation or the basic earnings per share equation.
If you prefer to use the basic earnings per share calculation, the first step is to determine the company’s net income for the previous year; you also need to know the exact number of shares outstanding and divide the net income by the number of shares.
The simplest way to do this is to use a company’s net income for the previous year as the primary input; it is important not to confuse quarterly net income with annual net income to obtain accurate results.
You can find the number of outstanding shares on reliable financial sites; these are the shares available on the stock exchange.
Although it is not as simple as the previous one, it is more accurate because it considers the preferred shares that a company offers to its shareholders. Preferred shares, or dividends, would be the amount of money paid by the company to shareholders for its earnings.
This payment is usually quarterly, and to calculate it; it is necessary to determine the dividends of the company and the preferred shares; once this is determined, the company’s tips are subtracted from the annual net profit. The result is obtained by dividing the difference by the average number of shares outstanding.
Interpretation of the results
The calculations made above will help you know the company’s profitability, value, and performance, essential information for any investor. When you get a high EPS, you have a higher payout.
The EPS is used to buy companies, indicating the best to invest in and have good results. It is also a good solution to use EPS growth trends to forecast future profitability.
EPS can also determine the value of the shares. However, this is a complex process, and it is ideal to have professional help.
An effective measure to see the health of a company is to understand its earnings per share; traders and analysts constantly use it. If you want to invest in a company and want to know the value of its shares, knowing the EPS is essential.
If you are an investor, EPS will help you compare two companies in the same sector and determine which one has a better performance. It is also a way to know its profitability in the past and how it will look in the future.
According to what has been mentioned, it is necessary data to know the company’s quality and if you will make a good decision by acquiring a share in it.
Can represent EPS in three different ways; depending on the origin of the numbers, you will be able to evaluate other data:
This data is based on the previous year’s figures and is obtained by calculating the last four quarters’ profits to obtain each share’s earnings. Almost all the data obtained in the stock market use the final EPS to get more realistic figures. However, investors do not pay much attention to this EPS because they will not be able to have a projection of future statistics.
The basis of these EPS is the projected future numbers; it is used by analysts or the company itself in most cases, this is because they want to show the potential income obtained in the company.
As the name indicates, it uses data from the current year and includes projections. The figures for the four quarters of the current fiscal year are used for the calculation. Thus, you have actual figures.