Home
Tax
Accounting
Payroll & Benefits
Public Companies

 

Earnings Per Share (EPS) - Earnings per share represents the net profit earned on behalf of each share of outstanding common stock. Earnings per share does not represent the amount of money distributed to shareholders. The payment of such money is called dividends. When calculating EPS, it is more accurate to use a weighted average number of shares outstanding over the reporting period since the number of shares outstanding can change as a direct result of: stock splits, purchase of treasury stock, issuance of new stock, etc. The easy calculation to determine weighted shares outstanding is to add the number of shares outstanding at the beginning of the period to the number of shares outstanding at the end of the period and then divide by 2. The formula for diluted EPS is:

Number of shares outstanding at the BOP + number of shares outstanding at the EOP  / 2.

Another consideration of EPS is what is termed "diluted earnings per share". Diluted EPS expands on basic EPS by including the shares of convertible debt / prefered stock, warrants to purchase common shares, etc. This is an important calculation since it calculates what would be EPS if conversion of all contract conversions take place. Investors consider fully diluted EPS as an important measure.

Investors also need to be aware of earnings manipulation that can affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

You should note that there are three types of EPS numbers:

•Trailing EPS – last year’s numbers and the only actual EPS
•Current EPS – this year’s numbers, which are still projections
•Forward EPS – future numbers, which are projections