Earnings per share (EPS) - what is it in simple words: types, formulas and calculation

Greetings, dear readers of the Tyulyagin project! In addition to such familiar company indicators as income, profit, expenses, there are a number of specialized financial indicators that investors need to make successful transactions and choose attractive shares in the stock market. One such indispensable fundamental analysis indicator is earnings per share or EPS . What is earnings per share, how is it calculated, what are the main types and nuances associated with the calculation of this indicator in today’s article.

Formula and calculation of earnings per share EPS

Earnings per share (EPS) is calculated as net income divided by the number of company shares available . A more precise calculation adjusts the numerator and denominator for shares that may be created through options, convertible notes, or warrants. The numerator of the equation can also be changed if it is adjusted for discontinued/continuing operations. But we’ll talk about more complex calculations and formulas later in the article, but now the simplest formula for calculating EPS:

Earnings per share (EPS) = (NP - Dp) / Weighted average ordinary shares

where: PE - net profit DP - dividends of preferred shares

To calculate a company's earnings per share (EPS), its balance sheet and income statement are used. They are necessary to determine the number of common shares at the end of the period, dividends paid on preferred shares (if any), and net income. For a more accurate calculation, you should use the weighted average number of ordinary shares for the reporting period, since the number of shares may change over time.

Any stock dividends or stock splits must be reflected in the calculation of the weighted average number of shares outstanding. Some data sources on popular financial sites simplify the calculation by using the number of shares outstanding at the end of the period.

EPS and Price-To-Earnings

Making a comparison of the P/E ratio within an industry group can be helpful, though in unexpected ways. Although it seems like a stock that costs more relative to its EPS when compared to peers might be “overvalued,” the opposite tends to be the rule. Investors are willing to pay more for a stock, regardless of its historical EPS, if it is expected to grow or outperform its peers. In a bull market, it is normal for the stocks with the highest PE ratios in a stock index to outperform the average of the other stocks in the index.

Examples of calculating earnings per share EPS

The earnings per share (EPS) calculation for the three companies at the end of 2020 is as follows:

EPS From Continuing Operations

A company started the year with 500 stores and had an EPS of $5.00. However, assume that this company closed 100 stores over that period and ended the year with 400 stores. An analyst will want to know what the EPS was for just the 400 stores the company plans to continue with into the next period.

In this example, that could increase the EPS because the 100 closed stores were perhaps operating at a loss. By evaluating EPS from continuing operations, an analyst is better able to compare prior performance to current performance.

The calculation for EPS from continuing operations is:

EPS=NI − Pref.Div. (+or−) Extra.Items (+or−) Discontinued OperationsWeighted Average Common Shares\text{EPS}=\frac{\text{NI }-\text{ Pref.Div. }\left(+or-\right)\text{ Extra.Items }\left(+or-\right)\text{ Discontinued Operations}}{\text{Weighted Average Common Shares}}EPS=Weighted Average Common Shares

The essence of earnings per share (EPS) in simple words

Earnings per share (EPS) is one of the most important variables in determining a stock's price. It is also the main component used to calculate the price-to-earnings (P/E) ratio, where the E in P/E is earnings per share (EPS). By dividing a company's stock price by its earnings per share, an investor can see the stock's value in terms of what the market is willing to pay for each dollar of earnings.

EPS is one of many indicators you can use to select stocks. If you are interested in stock trading or investing, your next step is to choose a broker that suits your investment profile.

Comparing EPS in absolute terms doesn't mean much to investors because common shareholders don't have direct access to earnings. Instead, investors compare EPS to the share price to determine the amount of earnings and how investors generally feel about the future growth of the company and its stock.

Example 3: Zoom and AT&T

To understand, let’s look at the example of two companies from the same sector - Telecom Services: Zoom and AT&T.

1. To do this, let’s take the moving average (TTM) Diluted EPS (for simplicity, you can look at the stock reports):

• Diluted EPS Zoom (TTM) = 1.44.
• AT&T Diluted EPS (TTM) = 1.52.

As you can see, the EPS values ​​are not very different. But until we look at the share prices of these issuers, this in no way indicates any advantages.

2. Let’s find the stock price (for example, as of 12/10/20):

• Zoom price = $385.96.
• AT&T price = $31.46.

3. Let's look at the price/earnings per share (P/E) ratio:

• P/E Zoom = 385.96 / 1.44 = 268.02.
• AT&T P/E = 31.46 / 1.52 = 20.7.

As we can see, Zoom shares are actually very overvalued. Zoom's P/E is behind most of its sector peers. And in the overall valuation picture, AT&T shares are much more attractive to investors.

Basic and diluted earnings per share

The formula used in the table and examples above calculates the underlying EPS of each of these three companies. Basic earnings per share do not take into account the dilutive effect of shares that the company may issue. When a company's capital structure includes elements such as stock options, warrants, and restricted stock units (RSUs), these investments, if exercised, can increase the total number of shares outstanding in the market.

To better illustrate the impact of additional securities on EPS, companies also report diluted earnings per share (diluted EPS), which assumes that all shares that could have been outstanding have already been issued.

For example, the total number of shares that can be created and issued using NVIDIA convertible instruments at the end of 2020 was 10 million. If this number is added to the total number of shares outstanding, its diluted weighted average number of shares outstanding is 617 million + 10 million = 627 million shares. Therefore, the company's diluted earnings per share at the end of 2021 were $4.33 billion / 627 million = $4.90.

Sometimes an adjustment to the numerator is required when calculating fully diluted earnings per share. For example, sometimes a lender will provide a loan that allows them to convert debt into equity under certain conditions. The shares that would be created by the convertible debt must be included in the denominator of the diluted EPS calculation, but if that were to happen, the company would not pay interest on the debt. In this case, the company or financial analyst will add the interest paid on the convertible debt back into the numerator of the EPS calculation so that the result is not skewed.

Frequently Asked Questions

What is a good earnings per share (EPS)?

What counts as a “good” earnings per share (EPS) will depend on factors such as the recent performance of the company, the performance of its competitors, and the expectations of the analysts who follow the stock. Sometimes, a company might report growing EPS but the stock might decline in price if analysts were expecting an even higher number. Likewise, a shrinking EPS figure might nonetheless lead to a price increase if analysts were expecting an even worse result. It is important to always judge EPS in relation to the company's share price, such as by looking at the company's price to earnings ratio (P/E) or earnings yield.

What is the difference between basic EPS and diluted EPS?

Analysts will sometimes distinguish between “basic” and “diluted” EPS. Basic EPS consists of the company's net income divided by its outstanding shares. It is the figure most commonly reported in the financial media, and it is also the simplest definition of EPS. Diluted EPS, on the other hand, will always be equal to or lower than basic EPS because it includes a more expansive definition of the company's shares outstanding. Specifically, it incorporates shares that are not currently outstanding but could become outstanding if stock options and other convertible securities were to be exercised.

EPS, excluding results of extraordinary circumstances

EPS can be distorted, either intentionally or unintentionally, by several factors. Analysts use variations on the basic EPS formula to avoid the most common ways of inflating EPS.

Imagine a company that owns two factories for the production of smartphone screens. The land on which one of the factories is located has become very expensive as new startups have surrounded it over the past few years. The company's management decides to sell the plant and build another one on less expensive land. This deal brings a windfall to the firm.

Although this sale of land resulted in an actual profit for the company and its shareholders, it is considered a “result of extraordinary circumstances” since there is no reason to believe that the company will be able to repeat this transaction in the future. Shareholders may be misled if windfalls are included in the numerator of the EPS equation, so they are excluded for a more accurate estimate.

A similar argument could be made if a company were to suffer an unexpected loss (such as a factory burning down) that would temporarily reduce earnings per share, that loss should be excluded from the calculation for the same reason. Calculation of earnings per share without taking into account the results of extraordinary circumstances:

EPS = (NP - DP ± RPO) / Weighted average ordinary shares

where: PE - net profit DP - dividends of preferred shares RCHO - results of emergency circumstances

EPS from continuing/discontinued operations

Let's imagine that the company started the year with 600 stores and had EPS of $6. However, let's say that this company closed 100 stores during this period and ended the year with 500 stores. A financial analyst will want to know what the earnings per share were for just the 500 stores the company plans to open in the next period.

In this example, it could have increased earnings per share because the 100 closed stores may have been operating at a loss. By estimating earnings per share from continuing operations, the analyst can better compare past performance with current performance.

Calculation of earnings per share (EPS) from continuing/discontinued operations:

EPS = (NH-Dp ± RChO ± PD) / Weighted average ordinary shares

where: PE - net profit DP - dividends of preferred shares RCHO - results of emergency circumstances PD - discontinued/continuing operations

Images in EPS format

The EPS file recording format (Encapsulated PostScript File or encapsulated PostScript) is designed for saving complex single-page graphic images that can simultaneously contain:

• raster image (preview) for quick viewing;
• raster images: digital photographs or scanned images;
• two-dimensional (flat) vector graphics;
• texts;
• various combinations of all of the above.

The EPS format, developed by Adobe Systems, is based on the PostScript (PS) graphic description language, which, in turn, was developed by the same company to control the first laser printers from Apple . The PostScript language allows you to create a program for displaying complex graphic objects: layouts, illustrations, and other graphic and line images. It ensures their high-quality printing on a printer in the form that the user sees them on the monitor screen, working in a graphics editor or desktop publishing program.

The EPS format supports various color spaces, such as Grayscale, Lab, RGB or CMYK, which makes this file format widely used in the printing industry. Files saved in EPS have long been the standard for transferring digital images between different graphics programs, both within the same operating system and across different systems, for example, between Windows and Mac OS.

Earnings per share and equity

An important aspect of earnings per share that is often ignored in calculations is the capital required to generate earnings (net income). Two companies may generate the same earnings per share, but one may do so with fewer net assets; this company will use its capital more efficiently to generate income and, all other things being equal, will be a “better” company for the investor in terms of efficiency. A metric that can be used to identify better performing companies is return on equity (ROE).

EPS and Capital

An important aspect of EPS that is often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS, but one could do so with fewer net assets; that company would be more efficient at using its capital to generate income and, all other things being equal, would be a “better” company in terms of efficiency. A metric that can be used to identify companies that are more efficient is the return on equity (ROE).

Earnings per share and dividends

Although earnings per share are widely used to track a company's performance, shareholders do not have direct access to these earnings. Some of the profits may be distributed as dividends, but all or part of the earnings per share may be retained by the company. Shareholders, through their representatives on the board of directors, must change the percentage of earnings per share that is distributed through dividends in order to gain access to a larger portion of those earnings.

Because shareholders cannot access the EPS associated with their shares, it can be difficult to determine the relationship between EPS and the share price. This is especially difficult for companies that do not pay dividends. For example, technology companies often disclose in their prospectuses and initial public offering (IPO) documents that the company does not pay dividends and has no plans to do so in the future. At first glance, it's difficult to explain why these shares have any value to shareholders.

The actual par value of EPS also has a relatively indirect relationship with the share price. For example, the EPS for two stocks may be the same, but the stock prices may be very different. For example, in October 2021, Southwestern Energy Company (SWN) earned $1.06 per share in diluted earnings from continuing operations at a share price of $5.56. However, Mellanox Technologies (MLNX) had earnings per share of $1.02 from continuing operations with a share price of $70.58.

At first glance, SWN appears to be the better deal because the investor is paying only $5.25 per dollar of earnings ($5.56 share price / $1.06 per share = $5.25). Investors in MLNX are paying $69.20 per dollar of earnings ($70.58 per share / $1.02 per share = $69.20). This ratio is also known as the ratio or price/earnings ratio (P/E).

While the comparison between MLNX and SWN is extreme, it is generally difficult for investors to compare EPS and share prices between industry groups. Stocks that are expected to grow (e.g., technology, retail, industrials) will have a higher price-to-EPS (P/E) ratio than those that are not expected to grow (e.g., utilities, consumer staples).

How to view downloaded EPS

If you need to download an EPS file and view it on your monitor screen, you can use a graphic file viewer or viewer: from the English Viewers. Viewers are faster than image editors, but have fewer or no image editing capabilities. Before viewing, a vector image is usually converted to the raster format JPG, BMP, GIF or PNG.

Among Adobe programs, Adobe Bridge is usually used . It allows you to open and view files of all recording formats used in Adobe's desktop publishing suite. Files are viewed as is, without any intermediate conversion. Graphic files can be selected and transferred for editing to the appropriate editor for the file type. In addition, files can be moved between folders, renamed, deleted, and so on.

You can open and view EPS in Adobe Acrobat. Before viewing, the image will be converted to PDF format, which significantly increases the waiting time before viewing the image.

ACDSee is very similar in functionality to Adobe Bridge. As a standalone software product, ACDSee has the ability to edit certain types of images.

Among the freely distributed viewers, you can pay attention to programs such as IrfanView, Fresh View, XnView, FileViewPro and the like. These programs tend to run very quickly and are designed to view a wide variety of multimedia files. You can also open and view files in EPS format through online services on the Internet.

EPS and Price Earnings P/E Ratio

Comparing P/E ratios within an industry group can be helpful. Stocks that are expensive in terms of their EPS compared to similar stocks in the market, and the opposite will also be true. Investors are willing to pay more for a stock, regardless of its historical EPS, if it is expected to grow or outperform its peers. In a bull market, it is not unusual for stocks with high P/E ratios in a stock index to outperform the average of other stocks in the index.

EPS and Dividends

While EPS is widely used as a way to track a company's performance, shareholders do not have direct access to those profits. A portion of the earnings may be distributed as a dividend, but all or a portion of the EPS can be retained by the company. Shareholders, through their representatives on the board of directors, would have to change the portion of EPS that is distributed through dividends in order to access more of those profits.

Because shareholders can't access the EPS attributed to their shares, the connection between EPS and a share's price can be difficult to define. This is particularly true for companies that pay no dividend. For example, it is common for technology companies to disclose in their initial public offering documents that the company does not pay a dividend and has no plans to do so in the future. On the surface, it is difficult to explain why these shares would have any value to shareholders.

The actual notional value of EPS also seems to have a relatively indirect relationship with the share price. For example, the EPS for two stocks could be identical, but the share prices may be wildly different. For example, in October 2021, Southwestern Energy Company (SWN) earned $1.06 per share in diluted earnings from continuing operations, with a share price of $5.56. However, Mellanox Technologies (MLNX) had an EPS of $1.02 from continuing operations with a share price of $70.58.

On the surface, it seems like SWN is the better deal because an investor is only paying $5.25 per dollar of earnings ($5.56 share price / $1.06 EPS = $5.25). Investors in MLNX are paying $69.20 per dollar of earnings ($70.58 share price / $1.02 EPS = $69.20). This ratio is also known as the earnings multiple or Price/Earnings (P/E) ratio.

Although the comparison between MLNX and SWN is extreme, investors will generally find a comparison of EPS and share prices between industry groups to be difficult to compare. Stocks that are expected to grow (eg, technology, retail, industrial) will have a larger price-to-EPS (P/E) ratio than those that are not expected to grow (eg, utilities, consumer staples).

Summary

What Earnings Per Share (EPS) is "good"?

What is considered "good" earnings per share (EPS) will depend on factors such as the company's recent performance, the performance of its competitors, and the expectations of the analysts who follow the stock. A company may report earnings per share growth, but shares may fall in price if analysts were expecting higher earnings. Likewise, a reduction in EPS could lead to higher prices if analysts were expecting an even worse result. It's important to always evaluate EPS relative to the company's share price, such as the company's price-to-earnings (P/E) ratio or earnings yield.

What is the difference between basic earnings per share and diluted earnings per share?

Analysts sometimes make a distinction between "core" and "diluted" EPS. Basic earnings per share consists of a company's net income divided by the number of shares it has outstanding. This is the number most often reported in the financial media, and it is also the simplest definition of EPS. On the other hand, diluted earnings per share will always be equal to or lower than basic earnings per share because it includes a broader definition of a company's outstanding shares. In particular, diluted earnings per share includes shares that are not currently outstanding but may become issued if stock options and other convertible securities are exercised.

What is the difference between earnings per share and adjusted earnings per share?

Adjusted EPS is a type of calculation of net earnings per share in which the financial analyst adjusts the numerator. Typically, this consists of adding or removing components of net income that are considered non-recurring. For example, if a company's net income was increased based on a one-time sale of a building, the analyst could subtract the proceeds from that sale, thereby reducing the net income. In this scenario, adjusted earnings per share would be lower than core earnings per share.

• Earnings per share (EPS) is a company's net income divided by the number of common shares outstanding.
• EPS shows how much money a company makes per share and is a widely used metric for assessing corporate value.
• A higher EPS indicates greater value, as investors will pay more for a company's shares if they think the company has higher earnings relative to its share price.
• EPS can be obtained in several forms, such as the exclusion of extraordinary circumstances or discontinued operations, or diluted EPS.

And that's all about earnings per share (EPS) for today. I hope the article was useful to you. Successful investments and see you again on the pages of the Tyulyagin !

About images in general

The quality of a raster image depends on the pixel density per unit length . The higher it is, the more image detail can be conveyed. At the same time, changing the geometric dimensions of the picture, without changing the total number of pixels, leads to a loss of image quality.

In vector graphics, an image is described mathematically using line segments that form irregular geometric shapes of varying complexity on a plane. A contour of this shape is characterized by its thickness and color, and the surface inside the contour is characterized by its fill color. Vector images are transformed without loss of quality. When printed, vector graphics are converted into raster graphics with the appropriate raster density, which ensures high quality of the printed image.

We are sure that you will find this article about how to open .tmp files useful.