What is Earnings Per Share? What are the various types of earnings per share?

What is Earnings Per Share? What are the various types of earnings per share?
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What is Earnings Per Share? An Overview

EPS meaning in share market is used as an indicator used by investors for the fundamental analysis of a company. It is measured by dividing the company's net income by the total number of outstanding shares in the company. A higher EPS indicates the profitability and good performance of the company. In this article, we are going to learn about what is eps, eps meaning in the stock market and its advantages to fundamental investors. 

What is EPS in Share Market?

EPS full form in share market is Earning per share. It is a part of a company's profit that is distributed to each share of the stock. Earning per share is a fundamental metric used by investors to analyze a company to make informed decisions on their investments. It represents how much money a company is making for each share. The company reports its EPS every quarterly the business net income by the total number of issued shares of the stock. A higher EPS represents that the business is profitable and more valuable to shareholders. 

Earning per share can be measured in two ways: 

  1. Earning per share can be measured by dividing the net income after tax by the total number of issued shares in the market. 
  2. Weighted earnings per share can be measured by subtracting total dividends from net income after tax by the total number of outstanding shares. 

Earnings Per Share (EPS) Formula and Calculation

EPS is profit. Net income divided by shares outstanding. Costs, interest, taxes, and other charges are subtracted from revenue to calculate net income. Earnings per share illustrate how much of every business dollar goes to profits.

ABC Corporation ended FY18 with 100 million shares outstanding (December 31). $2B/100M=FY18 EPS

$2/$100=0.02c/share

EPS and Price-to-Earnings (P/E)

P/E ratio compares firms within an industry, sector, and nation. Firm B would have a lower P/E ratio than company A since it has fewer earnings per share.

For P/E ratios, divide market cap by EPS (EPS). Total outstanding shares times current stock price equals market capitalization.

EPS and Dividends

Earnings per share is not a dividend. Shareholders receive dividends in cash which does not affect the company's earnings. Therefore, it is not considered in the EPS calculation.

EPS and Capital

"Earnings per share" (EPS) reflects a company's profitability and shareholder income. EPS analyses the income statement, balance sheet, and cash flow statement to calculate profit.

EBIT = Net Income / Outstanding Shares.

Company A's EPS for 2018 would be $200 ($1 million / 5 million) if it achieved $1 million in net income and had 5 million outstanding shares.

Key takeaway:

  • Earning per share in stock market shows how much money the business is making for each share. 
  • A higher EPS represents that the company is profitable enough to distribute the profits among its shareholders.

Increasing growth in Earning per share shows that the company is capable and is growing.

Different Types of Earnings Per Share

Different types of EPS can result in variations in EPS. There are five categories of earnings per share: 

  1. Reported EPS
  2. Ongoing EPS
  3. Retained EPS
  4. Cash EPS
  5. Book value EPS

Reported EPS

Reported EPS is calculated by using GAAP or Generally Accepted Accounting Principles. It is reported in the SEC filings. Although a company's earnings might be manipulated by GAAP. To explain more in detail, the income achieved through the one-time selling of machinery if used as operating income as per GAAP, the EPS will shoot upwards. Similarly, if a company venture agrees to treat important regular expenses as unfamiliar expenses, it will artificially improve the earnings per share. 

Retained EPS: 

Retained EPS means the corporation prefers to retain the profit instead of distributing it as dividends to shareholders. Company owners prefer to use the undistributed earnings to fund the company for growth prospects such as the expansion of business, research, and development or paying off debts, or for future needs. 

The profits that are not used within the given accounting year are attached to net earnings for the next accounting year. Retained earnings per share are measured by including the net profit in the present undistributed earnings and then removing the sum total of dividend paid from it. The remaining is then divided by the total number of issued shares. 

Formula to find retained EPS = (Net earnings + current retained earnings) - paid dividend/ total number of outstanding shares

Ongoing EPS: 

Ongoing EPS is established on ordinary net income eliminating income generally passed as an unexpected one time income. Hence, it enables the disclosure of anticipated income from core business ventures yet also it does not assist with the company's real earnings. 

Cash EPS:

Cash Earning per share assists to learn about a specific company's finances. It indicates the exact amount of money earned by the business. It is difficult to change cash earnings per share. 

Formula to calculate cash EPS: 

Cash EPS = cash flow from operating activities / issued diluted shares 

Book value EPS

Book value Earning per share is utilized to measure the mean amount of the company's worth in each share. It can also be utilized to evaluate the value of a business stake if it has to be liquidated. It is a portrayal of a corporation's accomplishment as it focuses on the statement of assets and liabilities of the company.  

Basic EPS vs. Diluted EPS

Net income divided by average outstanding shares yields basic EPS.

Diluted EPS includes conversions, stock options, warrants, and other instruments. A-B is easier than B-C. (unless you have an Einstein-level brain). Remove the C. Profits per share (EPS) will likely be smaller than your income statement.

Benefits of Earning Per Share

  • EPS is a fundamental metric used to measure the company's finances and profitability. 
  • It can be used to compare the EPS with its other peer or industry average EPS for making an informed investment decision. 
  • It is used to compare the financials of a company over the years. Companies having a steady and growing  EPS over years are preferable to investors rather than companies having irregular or decreasing EPS. 
  • When the EPS of a company is high, it means that it is earning profit for its investors and it also indicates that the company may increase its dividend payout ratio. 
  • EPS helps investors to track past financials of the company. 

What Are Some Limitations of EPS?

EPS disregard capital structure.

Companies with higher debt have lower EPS despite the same growth and ratios. Comparable EBITDA but distinct debt-to-equity ratios: 50% and 10%. Since the latter pays off debts quicker and has less interest, it will have $10 EPS. Many investors use P/E ratios to examine portfolio shares, which may confuse those who think all firms are priced similarly. Each company's equity is around $15 per share (each has about 50 million outstanding shares).

EPS Excluding Extraordinary Items

EPS excludes exceptional earnings. Normalized EPS is another term. EPS formula without strange components

Operating income divided by average common shares outstanding yields adjusted diluted earnings per share. Adjusted diluted profits per share include dilutive impacts from employee stock options, restricted stock, performance shares, and other contingently issuable shares. It doesn't include convertible debt into stock since bondholders decide, not the issuer.

Things to Keep in Mind while using EPS 

  • Business owners can operate the EPS by decreasing the number of outstanding shares by the reverse splitting of stocks to show their business is profitable. However, it may be beneficial in the long term but hampers the business goodwill in the long term. 
  • A high EPS metric doesn't necessarily represent that the company is profitable, you also need to check other fundamental metrics to make informed decisions. 

To conclude, EPS is an important metric for investors to analyze a company's fundamentals. However one should also keep in mind that you need to check other essential factors such as P/E ratio, debt to equity ratio, cash flow, Return on capital employed, return on equity, etc to make an informed investment decision. 

Weighted earnings per share

WACC is used to determine a company's market value. Weighted EPS is based on outstanding shares and share value. Weighted EPS employs a weighted average to calculate share value.

This sort of EPS is used when estimating the future value of an investment or comparing several firms' values using current market prices instead of historical data.

Weighted earnings per share assume that not all shares have an equal impact in deciding a company's worth; some may own more and have more significant sway (otherwise known as voting power).

How Are Earnings Per Share Calculated?

Earnings per share, or EPS, is a company's net income divided by the number of outstanding shares. It is one way to measure how profitable a company has been over a given period. The calculation is:

EPS = Net Income / Fully Diluted Number of Shares

The fully diluted number of shares refers to all potential equity instruments that could be issued and outstanding at any given time (e.g., options).

  • What is earning per share?

  • What is EPS in the share market?

  • How can you measure earnings per share of a company?

  • What is the importance of earning per share?

  • What are EPS and its types?

  • What's a good EPS?

  • What is a negative EPS?

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Disclaimer: This is not an investment advisory. The article above is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.