Earnings Per Share is a financial term that measures a company’s net income available to the common shareholders by measuring the outstanding shares.
EPS Ratio measures the company’s capability to produce profits for stakeholders. EPS Ratio is more important when you are analyzing against other companies in the industry and when you are comparing the company’s share price.
If there are two companies in the competition with a similar number of shares remaining, a company with more EPS ratio is in profit rather than the company with less EPS. EPS ratio is used with the company share price to estimate whether it is either expensive or cheap.
EPS = (Net Income-Preferred Dividends)/Average Shares Outstanding.
Earnings per Share Examples
The EPS Ratio has simple math. Just divide the net income by the total number of shares remaining.
Let’s take an example. A certain company has a net income of $1 million. It announces the shares of $250,000. Total shares allotted in the period were 2,000,000, with total shares outstanding at 100,000. The EPS Ratio of the company will be
EPS=$-$0.15 (We regard this as a negative EPS, which we will discuss later in this article).
However, nowadays, five variations of EPS are being used.
You need to understand that different EPS ratios have relative importance in the financial calculations, and the term is very crucial when making decisions related to the company’s stock. The EPS Ratio can differ between what is typically reported in the financial statements with what is reported in the headlines. Depending upon the type of EPS used, a stock may be undervalue or overvalue.
Earnings per Share Example 2
An ABC company has a net income of $1million, with shares remaining of 11 million and dividends of $0.25 million. The EPS Ratio at this point will be.
Earnings per Share Example 3
Let’s take an instance where a company has reported a net income of $4million. During the relevant time frame, a company has 10 million shares remaining. As such, the company EPS ration will be
GAAP EPS or Reported EPS
Reported EPS is an accounting and financial term. It accounts the results in SEC filings. A company calculated earnings could be distributed in Reported EPS or Gap EPS. Let’s take the example of a company that sells machinery.
A particular income from the sales of that machinery will be regarded as operating income under GAAP allowing EPS to point. Similarly, a company can consider a normal operating income as an unusual charge and can subtract it from the latest financial calculations, which would itself enhance the EPS.
Pro Forma/On-Going EPS
Pro Forma or On-Going EPS will give you the exact net income and therefore subtracts everything relevant to the company’s outgoing revenue i.e., the salaries of the employees, the finance that the company consumes to power its operations.
The main objective of on-going EPS is to discover the stream of earnings from central operations. On-Going EPS is an indicator of future EPS.
On-Going EPS is also regarded as Pro-Forma EPS. Pro-Forma is something that is used in the formulae.
Pro-Forma typically excludes income that is used to calculate reported earnings. Let’s take an example. A company sells its large portion, and in reporting the historical results, it excludes the large expenses and revenue associated with that particular portion. This alters a possible comparison and allows you to compare apples with apples.
Book Value/Carrying Value EPS
Carrying value EPS is considered as the book value of equity/share. It calculates the ratio of the company’s part in each share.
Usually, a Balance Sheet is used to measure the book value EPS. EPS calculated using the Book value method is regarded as a static picture of the company’s performance.
Carrying value EPS depicts how operational the management is at enhancing shareholder equity.
Retained EPS takes the net earnings; the simple formula of retained earnings is (Earnings-All Dividends)/Total Number of Shares.
Retained EPS measures the amount of company profit rather than that of the stockholders in the form of dividends. Retained Earnings during the period is the profit that the company keeps.
It is added to the balance sheet. There could also be a loss in the Retained earnings, which is regarded as negative EPS. It is usually deducted from the net earnings.
The main benefit of Retained Earnings is that a company can use it to pay off debts, or it can use it to expand its operations to generate future income. Otherwise, it will be regarded as reserve.
Cash EPS is an operating cash flow EPS divided by the mixed number of shares. Cash EPS is important in terms of it being pure EPS.
It pictures the real cash earned and cannot be regarded as net income.
Let’s take an example of a company with an EPS of $1 and cash EPS of $2.
You can prefer it over the firm with the Earnings Per Share Ratio of $2 and with cash Earnings Per Share Ratio $1. However, in such a scenario, there are many issues to keep in mind, and the company with more revenue or reserves is in better financial position.
Why EPS Matters?
EPS is often a parameter to determine the profitability of a company per shareholder. It is a key driver of share prices and a denominator in the P/E calculation.
There is the basic EPS and fully mixed EPS. Fully mixed EPS has an EPS ratio with different mix, such as securities, warrants, and stock options, and is regarded as a more accurate measure. It can be easily calculated on an EPS calculator on online websites such as calculators.tech.
Negative EPS is regarded as the loss EPS. It is the result of the earnings which are in loss. Negative EPS depicts how much money a company has as a loss based on per share.
If you are a shareholder in the company, Negative EPS will not affect you directly; however, it can affect you indirectly. While you don’t have to pay the company directly, you will suffer from it indirectly. Negative EPS decreases the value of the company and decrease the income per share.