EPS or Earnings per share is one of the most important terms in the finance domain. Especially, if you are an investor or a shareholder, you should special focus on this number and the trend it is following.
Earnings per share (EPS) is the part of a company’s profit which is allocated to each outstanding share of the stock. It is a very useful metric which can help in judging a company’s financial health.
EPS is calculated by taking net income and subtracting the preferred dividends from it. The value obtained has to be divided by the average number of outstanding shares. Preferred dividends are those paid on a company’s preferred stock.
A higher EPS indicates that the company is profitable and is also able to pay money to its shareholders.
Types of EPS
Trailing EPS: It is the most commonly used form of EPS because it represents what happened in the past with certainty. Correctly predicting the future is very difficult. Thus, this form of EPS uses the earnings number of the previous four quarters.
Current EPS: In this, current earnings are taken to calculate EPS. Some quarter of earnings data may have been out already, and some of that is yet to come. Thus, current EPS uses some of the actual data and some of the factual data.
Forward EPS: As the name suggests, EPS calculated in this form takes into the estimates of earnings that may come in the future. Earnings are forecasted by the analyst. Based on these forecasted earnings, forward EPS is calculated.
Calculating Earnings per Share
EPS = net income – preferred dividends / average outstanding common shares
Example : Let Net Income = Rs 10,00,000 and Preferred Dividends = Rs 2,00,000. If Average outstanding common shares = 5,00,000 then,
EPS = (10,00,000 – 2,00,000)/5,00,000 = Rs 1.6