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What is Earning Per Share (EPS) and the Formula to calculate it?

Updated: Sep 18

Now to become a successful investor, it's Important to thoroughly familiarize yourself with

a few Investment basics and one of the important basic you have probably heard it before which is

Earning Per Share. Now we are going to dive into it and going to look a little closer at it.

Terms which we are going to describe in this article:-


A. What is Earning per Share (EPS) and its use?

B. How to Calculate Earning Per Share (EPS)?

C. Difference between Basic and Diluted EPS?

D. Advantages and Disadvantages of Earning Per Share (EPS)?


A. What is Earning Per Share (EPS) and its use in the Stock Market?


EPS is Know as the "Earning Per Share". EPS is a company's net income divided by the number of shares the company has outstanding. Basically, it defines the profit of a company per outstanding share of Stock. It is one of the most important measurements of a companies profitability.


EPS is typically reported each quarter when a company releases its earnings report. If the company is profitable for its EPS will be positive and if the company loses money over a given quarter then the EPS will be reported negative. The quarterly estimates of EPS are very important for the Short-Term movement of the company's stock.


Earning Per Share or EPS is one of the most important financial measurements which indicates the growth and profitability of a company. So before investing in the Shares of any company always check the annual EPS of the company. But How we Can calculate the EPS of any company?


So, now the question arises that how we can find or calculate the EPS of any company?

Let's See...


B. How to Calculate the EPS of any company?


EPS can be calculated by dividing the company net Income plus Dividend or Preferred Stocks by it's Average of outstanding Shares. Since the number of outstanding shares the company has is going to vary because the company buys and sells its stock and they have stock options. So the accurate EPS is obtained by averaging the number of shares over a given time.

If you want to find the EPS of a company more accurately then you can subtract the Preferred dividend of a company from its net income and divide it from the Average number of outstanding shares or from the total number of outstanding shares.


You can also use the currently outstanding shares of a company and still you will get a pretty accurate measurement. To find the currently outstanding shares you can use this formula:-


NOTE = Take the Market Capitalization and the Current Share Price after the closing of the Market.


The significance of Earning per Share is that it will show how much money a company is making for its shareholder on a per-Share Basis. But the more important thing is that looking at the companies EPS gives us an idea of how fast the company is growing from quarter to quarter.


If you want to invest in a company that has been steadily increasing its EPS from quarter to quarter you're going to find that the company has a very consistent steady growth rate of earning. Now a day's you can get the EPS of companies in many investment websites So there is no need to calculate it. In case if you are not getting the EPS of any Company you can find it through the formula which we have discussed above.


EPS is used to find out the P/E ratio of a company which means the Price-To-Earning ratio. With the help of the P/E ratio, we can find whether the company is valued or overvalued. To find the P/E ration of a company divides the share price of a company by its Earning Per Share (EPS).

NOTE = P/E ratio is also one of the important financial measurements. Which Indicates the value of a company. So before investing in any stock or a company always look after its P/E ratio.


C. Difference Between Basic EPS and Diluted EPS.


Basic EPS = Generally basic EPS measures how much the company Earns in its per-share without going much onto any other details. It is simply found out by dividing the Net Income subtracted from the preferred share by the total no. of outstanding shares or average outstanding shares of a company.


The purpose to find the Basic EPS of a company is to find out the profitability of a company, but it does not include any convertible securities in its calculation. The formula which we have discussed above in this article is for the Basic EPS.

Diluted EPS = Diluted EPS considers the convertible security of the account to calculate the Earning Per Share of a company. Basically, the Diluted EPS helps to find out the earnings of the company per Convertible share. The convertible securities which have been taken include the convertible preferred shares (CPS), Employ stock options (ESOPS), Debt, and Equity.


The basic difference between the Basic EPS and Diluted EPS is that all the convertible securities which has been mention above will be exercised while calculating the diluted EPS. To calculate the Diluted EPS of any company you have to simply divide the net income subtracted from the dividend on preferred stocks by the average outstanding shares added to the Diluted Shares of the company. Diluted EPS is used to find out the profitability of a company by including its convertible shares.

D. Advantages and Disadvantages of Earning Per Share (EPS).


Advantages Of EPS

  1. EPS shows the profitability of a company which helps us to understand that if we invest in that company our money will grow or not.

  2. With the help of EPS and other financial methods an individual can determine the companies existing and anticipated Stock value.

  3. With the help of EPS we can track the performance of a company in pastime and according to that we can make our investment decision on that company.


Disadvantages of EPS

  1. The companies can manipulate the EPS by reducing the number of outstanding shares by buying back their shares.

  2. The EPS does not consider inflection, the growth indicated may not be accurate in the first place.

  3. Cash flow is an important aspect when it comes to determining the ability of a company to repay its debt. But the cast flow is not taken into consideration in the EPS calculation.








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