How to Calculate EPS in Business Finance
The U.S. Securities and Exchange Commission (SEC) defines earnings per share (EPS) as how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period. For example, if Widget Corporation earned $2 million last year and had 1 million shares outstanding, simple EPS would value each share at $2.
However, this is just the beginning. Depending on internal management needs and SEC filing requirements, EPS can go far beyond simple calculations.
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Things You'll Need
- Income statement
- Balance sheet
- Excel software or business calculator
- Company's annual or quarterly SEC filing
Instructions
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How to Calculate EPS in Business Finance
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The first step toward calculating simple EPS is determining the weighted average number of shares (WAS) outstanding. While earnings accumulate throughout the year, the actual number of outstanding shares often fluctuates. This information can be found on the balance sheet's shareholder equity portion.
Calculation example: Company X had 400 shares outstanding in the first and third quarters, 600 shares outstanding in the second quarter and 2,400 shares outstanding in the fourth quarter.
Note: Remember that four quarters of three months each equals one year: One quarter, or 3 months/12 months = 0.25
Q1: 400 x 0.25 = 100
Q2: 600 x 0.25 = 150
Q3: 400 x 0.25 = 100
Q4: 2,400 x 0.25 = 600100 + 150+ 100+ 600 = 950 total weighted average number of shares outstanding.
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Simple EPS is a standard calculation applicable to companies with no diluted shares outstanding, such as options, warrants, convertible bonds or convertible stock. Confirm diluted shares by examining the balance sheet's shareholder equity section.
If there are no diluted shares, use the income statement to derive simple EPS. Simple EPS = Net income minus preferred stock dividends divided by the weighted average number of common shares outstanding.
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Diluted EPS is a more complex method of determining what shares are truly outstanding if all exercisable warrants, options, etc. were converted into shares at a point in time, generally the end of a quarter. It is considered a more conservative approach. Diluted EPS = [(net income -- preferred dividend)/weighted average number of shares outstanding - impact of convertible securities - impact of options, warrants and other dilutive securities].
If the company is publicly traded, diluted EPS can also be found on the Income Statement portion of a company's 10Q or 10K filing.
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While simple and diluted EPS is usually sufficient for most investors, there are other definitions of EPS to keep in mind.
Reported EPS: Obtained by calculating earnings according to GAAP (generally accepted accounting principles).
Ongoing EPS: Calculated by taking ongoing net income and excluding any unusual one-time event in order to determine core operational earnings. This method is also called "pro forma" EPS.
Headline EPS is the highlighted company press release number. It can either be a pro-forma calculation or an external analyst-calculated EPS.
Cash EPS: Calculated by dividing operating cash flow by diluted shares outstanding. Since operating cash represents actual cash earned and cannot be easily manipulated, it is considered a more reliable standard.
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