A complete guide to earnings per share (EPS) and how to calculate it A complete guide to earnings per share (EPS) and how to calculate it A complete guide to earnings per share (EPS) and how to calculate it

A complete guide to earnings per share (EPS) and how to calculate it

Financial Events

Saxo Group

Trading stocks is all about figuring out a company’s current value and future potential, but the relative value of a company isn’t always easy to judge. One way to determine how a company is performing is by looking at its earnings per share.

It’s not the only performance metric you should use, but it’s an important one. So let’s explore what earnings per share means and how to calculate it. 

Publicly listed companies: share structures

When a company gets listed on a stock exchange, it’s known as going public. Members of the public can buy shares in a public company, as opposed to the shares solely being owned by a group of private investors. To become a publicly traded (aka listed) company, the executives of the company need to implement a share structure. 

We won’t delve too far into the nuances of share structures. It’s just good to know that public companies have share structures, which means the public (you) can buy a stake in said company. 

For example, when Tesla went public on Nasdaq in 2010, it was the first time people could buy stock in the company. Anyone with Tesla shares has a financial stake in the company. Specifically, owning shares means you have a claim to part of the company’s overall value (i.e. assets and profits). 

Why companies go public 

Why would companies like Tesla go public and give away part of the company? There are various reasons, but the main one is to raise money. Companies like Tesla go public to attract investment from the public. In return for public investment, public companies have to give away a percentage of value, which they do via shares. 

One of the main requirements of going public and selling shares is that the company must report its financial performance regularly. Giving the general public access to this data is not only a legal requirement, it gives investors a chance to see what sort of financial state a company is in. 

Reports show you a company’s financial status 

This brings us to the topic in question: earnings per share. When a company publishes an earnings report, it contains lots of information about its current performance and future projections. One performance metric within the earnings report is the company’s earnings per share (EPS). We’ll get into why this is important soon. 

However, let's recap the basics. In summary:

  • Public companies sell stock.
  • That means you can own shares in a company and have a stake in its fortunes (i.e. its successes and failures).
  • To sell shares, a company has to provide details about its performance and one way it does this is through an earnings report.
  • You can use an earnings report to see how a company is structured, its profit/loss and, from this, determine how much money the company is making/losing per share.

Knowing a company’s earnings per share can help you determine how profitable it is. That’s why it’s important to understand the dynamics of publicly listed companies and the obligations that come with selling shares.

What is earnings per share?

Earnings per share (EPS) is the amount of money a company earns per share. A more technical way of saying this is: EPS is a company’s profit divided by its outstanding common stock. Breaking this down, we get:

Company profit = the net profit of a company is the money it makes after expenses (operating costs, interest, tax) have been deducted.

Outstanding common stock = Outstanding stock is held by shareholders, i.e. the shares are owned by people/groups outside of the company and, therefore, classed as outstanding. The counter to common stock is preferred stock (more on this later).

When you divide a company’s net profit by the amount of outstanding stock, you get an earnings per share calculation.

The earnings per share formula: how to calculate earnings per share 

You can already see how to calculate earnings per share. When everything we’ve said so far gets put into a formula, we get: 

EPS = Net Income - Dividend Payments / weighted average shares outstanding 

The one variable we haven’t discussed is dividend payments. Public companies can be structured in a way that allows them to have two types of stock: preferred and common. Preferred stock is reversed for certain people/groups. Each company can decide what percentage of its stock is preferred and who owns it. 

Preferred stockholders have different rights than common stockholders (i.e. everyone else with shares). Preferred stock doesn’t offer any voting rights. That means the people/groups that own preferred stock can’t vote on changes to the company like common stockholders can. 

However, when paying dividends, preferred stockholders get their cut first. If there isn’t enough money left after the preferred stockholders have received their share of a company’s profit, common stockholders miss out. This hierarchy means that dividend payments have to be considered when you calculate EPS. 

The good news is that a company’s earnings report will outline any details about preferred stock and what, if any, dividend holders receive. Once you know that, as well as a company’s profit (net income) number of common shares that are outstanding (i.e. owned), you can get an EPS figure. 

Where to find EPS data 

You can find EPS data in a company’s earnings report. You can click here for a guide to reading an earnings report. The good news is that, if you know what to focus on, an earnings report is fairly easy to understand. There are three main things to focus on: 

Earnings per share: this is a company’s net profit divided by outstanding common stock.  Being the most cited metric by financial media when analyzing earnings reports, earnings per share (net income/number of shares) is widely considered to be a better measure for assessing company performance than just profits. As a rule of thumb, the higher the EPS, the more attractive are the shares considered to be. Yet, there’s no ideal EPS threshold. Instead, the value lies in comparing the EPS growth against previous accounting periods and industry peers. I.e. a comparably good EPS growth is positive for the company’s stock price, and vice versa.   

Beating/missing estimates: you can see whether the company beat or failed to beat previous guidance/estimates.  Analysts across the globe project a wide range of company estimates, including revenue, EPS, losses, and sales. If the actual result beats the average of these estimates, the stock is likely to appreciate. Similarly, a below estimate figure would have a negative impact on the stock price. 

Guidance: what the company’s executives forecast for the coming months in terms of new projects, industry changes and expected earnings. The guidance section of the earnings report is known as “guidance”, and is likely to have a greater impact on the stock price than figures based on previous accounting periods; it’s the future that counts, not the past.    

Types of earnings per share data 

Earnings per share is a general term and you only need to think about this data in general terms. But, there are actually three types of EPS data: 

Trailing (past) earnings per share data 

It’s possible to calculate EPS numbers using data from previous quarters. Specifically, analysts will look at net profit data from the four previous quarters. This data is combined and used to generate a trailing EPS number. 

Profit to earnings (P/E) ratios are often calculated using trailing EPS numbers because the figures are set in stone. However, it can be a mistake to focus on past earnings per share data alone because it’s basically old news. It’s already happened, and events of the past don’t necessarily determine what will happen in the future. 

Current earnings per share data 

Current EPS numbers are based on four quarters’ worth of data. The typical strategy is to look at two previous quarters and projections for the proceeding two quarters. This means you get a combination of past and future data to get an idea of a company’s current performance. 

Future earnings per share data 

Future EPS numbers are based on projections. Like the other earnings per share calculations, analysts look at projections for four quarters. However, this isn’t always necessary. Future EPS calculations will be based on estimates provided by the company and/or analysts. 

The data isn’t definite, but it’s based on the best projections of the time and a company’s perceived earning potential. Future earnings per share data can be useful because investors want to know how profitable a company will be in the coming months. 

Using three types of EPS data 

Even a trading novice can see that relying on a single type of EPS calculation may not be the best idea. Trailing data may not be relevant because it’s based on figures from the past. Current data is a mix and future projections are basically educated guesses. 

Ideally, you’ll look at all three EPS calculations to get a complete overview of the company’s performance. But, if you’re only able to use one, going down the middle and using current EPS numbers is best. 

What does earnings per share tell us about a company? 

Earnings per share calculations tell you how a company is performing. Looking at profit/loss data is OK, but it doesn’t tell the whole story. That’s why we take this data and divide it by the number of outstanding common stock. This tells you how much money a company is making/losing per share. 

Why does that matter? Because, as we’ve said, public companies have a share structure. The dynamics of a company are determined by its share structure. Therefore, you need to know how profitable a company is in relation to its underlying share structure. 

Is there an ideal EPS number? No. Unlike other metrics in trading, there isn’t a set figure for earnings per shares data. The only way to tell if the latest calculations are good or bad is to compare them to previous figures. It’s also worth saying that you shouldn’t rely on EPS calculations alone. These are important things to look at, but they shouldn’t be the only performance metrics you use. 

Finally, just as it is when you’re trading forex, CFDs, commodities or any other financial instrument, nothing is guaranteed. Using EPS data won’t result in a positive trade. It could, but it’s not certain. Just because the EPS numbers are high and that causes the company’s share price to rise, this might not be the case forever. Trading always carries a certain amount of risk and EPS data doesn’t change that fact. 

The pros and cons of earnings per share analysis 

Learning how to calculate earnings per share and knowing what it means is important. In fact, if you’re going to invest in stocks, these skills are very helpful. But it’s also important to understand that these calculations aren’t the ultimate answer. They can’t tell you everything about the company and they shouldn’t be used on their own. Yes, EPS numbers are important, but there are some drawbacks when this data is used in isolation. 

Advantages of EPS data 

Some benefits of using earnings per share are: 

EPS and share price are related to each other 

EPS looks at a company’s performance based on its revenue and share structure. That means this data has a strong link to share price. In general, a high EPS leads to a high share price. 

It’s a simple calculation 

Calculating earnings per share is fairly simple. We’ve given you the formula and the context. Establishing a company’s EPS is easier than carrying out technical analysis, for example. 

It’s a statistical measure of performance 

Clear performance metric. It’s not easy to determine how strong or weak a company is. EPS gives you a way to measure performance statistically and provides some sort of empirical basis for your decisions. 

You know what shareholders are entitled to 

You get to see the value of a share with EPS. This means you know what a stake in the company is worth and what you could expect to receive. 

Disadvantages of EPS data 

Some problems with using EPS numbers in isolation are: 

Negative EPS data can be unreliable 

EPS calculations are great when a company is making a profit, but the formula runs into problems when a company is losing money. Negative EPS numbers are hard to calculate and can be unreliable. 

The figures might lie 
Earnings per share can be manipulated. We’re not saying companies do this or that you should assume something dodgy is going on. However, it is possible to affect earnings per share data by using certain accounting policies and strategies. 

You might ignore share price 
Using EPS could cause you to ignore a company’s share price. Even though a high EPS often leads to a high share price, the doesn’t mean the share price is at a point where it’s worth investing. Share price is relative. It might be an appealing price for you or in a given context, or it might not be. By only looking at EPS, you aren’t able to make these assessments. 

How to use EPS calculations in practice 

It's worth repeating that EPS numbers are important, but they shouldn’t be the only metric you use in your assessments. Here are some other performance markers and data points you should use to evaluate stocks: 

Industry and economics: look at the industry a company is involved in and what its current dynamics are. You also need to look at the wider economy and how it might affect a company’s performance. 

Strategy and guidance: what direction is the company heading? As well as looking at a company’s mission statement and roadmap, read the latest guidance in the earnings report to see what executives/analysts expect to happen in the coming months. 

Revenue, profit/loss and risk: you need to look at a company’s financials from a variety of angles. How much money is it making and how much of this income is profit? What are the company’s liabilities and risks? Is the company making a profit or a loss? You need to answer these questions. 

Share price: what is the current share price and does that reflect what you believe to be the true value of the company. 

News, data and insights: what’s happening in the world, and will it affect the company? You need to look at the financial world and consider breaking news, statistics and reports from experts. 

All of these metrics can be used with earnings per share numbers to give you a better overview of a company’s current position and future potential. 

Trade online using EPS 

Now you know the basics of earnings per share and how this information can be used to make decisions. The only thing left to do is put your knowledge into action. Before you jump into live trading and start using EPS data to guide your decisions within the stock market, try using a demo account.

A demo account gives you a virtual bankroll with which you can experience trading without any financial risk. Once you’re comfortable with how our trading platform works, the tools it offers, and how to place trades, you can switch to a live account. 

From there, make a deposit and start trading stocks armed with everything you now know about earnings per share data. 

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