Understanding and Calculating Basic Earnings Per Share EPS

The difference between Basic EPS and Diluted EPS lies in the number of outstanding shares used to calculate EPS. The first curveball that can come up when calculating Basic EPS is when the company in question has Preferred Stocks. Regardless of its historical EPS, investors are willing to pay more for a stock if it is expected to grow or outperform its peers. In a bull market, it is normal for the stocks with the highest P/E ratios in a stock index to outperform the average of the other stocks in the index.

Although the benefits can prove to be useful, they also come with limitations. Let us take a look at the advantages and disadvantages of stock option benefits. A company with a constant increase in its EPS figure is usually regarded to be a reliable option for investment. Furthermore, investors should use the EPS figure in conjunction with other ratios to estimate the future stock value of a company.

Basic EPS Formula

Every year, a company’s EPS should rise in absolute terms, together with an increase in the rate of those gains. In such cases, the company may be investing heavily in expenses like R&D to grow. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. As for the rest of the forecast, we’ll be using various assumptions to show various operating scenarios and the net impact on basic EPS.

This calculation involves adjusting the number of shares outstanding at the beginning of the period for any changes throughout the year. Earnings Per Share (EPS) is a fundamental metric in financial analysis, offering insights into a company’s profitability on a per-share basis. Investors and analysts closely monitor EPS as it provides a clear indicator of a company’s financial health and its ability to generate profits for shareholders.

The Net Income number you should use for Basic EPS is the “Net Income (Loss) Attributable to Uber Technologies, Inc.” That’s the profit metric after deducting the profit attributable to Non-Controlling Interest. In the next section, we’ll go over different curveballs that might arise when calculating Basic EPS. The land on which one of the factories sits has become very valuable as new developments have surrounded it over the past few years. The company’s management team decides to sell the factory and build another one on less valuable land. Although EPS is a helpful metric, it is better to correlate it with each of these or other indicators to provide a more comprehensive picture of a company’s current circumstances and future.

Financial Decisions Affecting Net Income

This method ensures that the EPS calculation reflects the actual number of shares that could potentially claim the company’s earnings. The next component, the weighted average shares outstanding, accounts for any changes in the number of shares over the reporting period. This adjustment is crucial because it provides a more accurate reflection of the shares available to investors throughout the year. For instance, if a company issues new shares or buys back existing ones, these actions will affect the weighted average calculation. By considering these fluctuations, the EPS figure becomes a more reliable measure of profitability.

That year the company did not issue additional shares but repurchased 40 million shares during the second half of the year.
EPS is often compared quarter-over-quarter or year-over-year to assess profitability trends.
That means it shows how much profit each share of the company’s stock earns.
Instead, you could look at the EPS trend over time to see if the company is on its way to becoming profitable, or evaluate other metrics like revenue growth, customer acquisition, book value, etc.
Public companies mostly disclose this number in their income statement immediately below the net income line.

One caveat, however, is that high-growth companies with minimal profits at the “bottom line” can still obtain high valuations from the market. As a general rule, higher basic EPS values signal greater firm value as in these cases, the market will tend to be willing to pay a premium for each share of a company’s equity. The second curveball that can come up when calculating Basic EPS is when the company in question has Non-Controlling Interest (see Course 10, Lesson 28). The vast majority of companies don’t have Non-Controlling Interest (NCI), so this doesn’t come up very often. This means the company earned $6.15 of profit for each of its shares in 2022. We simply take the company’s Net Income and divide it by the Basic Weighted Average Shares Outstanding.

Basic Earnings Per Share (EPS): Definition, Formula, Example

A more refined calculation adjusts the numerator and denominator for shares that could be created through options, convertible debt, or warrants. The numerator of the equation is also more relevant if it is adjusted for continuing operations. This occurs when a company buys back its own stock from investors and cancels the shares it has previously bought. As a result, there are fewer outstanding shares available overall, which increases the company’s EPS. To put it simply, earnings per share (EPS) is a measure of a company’s profitability.

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 to access more of those profits. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) mandate the disclosure of financial leverage both basic and diluted EPS in financial statements to ensure transparency. These disclosures allow analysts to perform valuations, assess profitability, and forecast performance accurately. Public companies are also required by the Securities and Exchange Commission (SEC) to reconcile differences between basic and diluted EPS in their filings.

Formula of basic earnings per share (BEPS)

Investors typically evaluate an EPS in relation to the consensus of analysts’ EPS forecasts for a stock to determine if it is good or poor. A company that more consistently beats estimates could be considered a better stock option than a company that doesn’t. Nevertheless, keep in mind that these EPS bets are also tips to manage money relative, based on the market and economic conditions for corporate profits.

When it comes to stock investing, knowing a company’s earnings per share (EPS) can be useful, but it’s only one element of the whole picture.
The second curveball that can come up when calculating Basic EPS is when the company in question has Non-Controlling Interest (see Course 10, Lesson 28).
Earnings per share (EPS) is of two types – (i) basic earnings per share (BEPS) and (ii) dilutive earnings per share (DEPS).
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.
It helps investors assess the efficiency of a company’s management in generating profits with the shareholders’ capital.

In general, investors are rather looking at how a company’s EPS has evolved over time or how it stacks up against their rivals’ EPS, as well as at the increase rate of the earnings. In such circumstances, negative income is a possible outcome, but it’s not always a terrible thing. A developing company with negative earnings can still be a smart investment if is using borrowed funds wisely and has a solid business plan that may turn a profit soon.

By analyzing these weighted average method of material costing pros and cons elements, investors can gain deeper insights into a company’s financial health and strategic priorities. This calculation shows that the company earned approximately $3.64 for each share outstanding, providing a clear view of the earnings available to shareholders on a per-share basis. This formula divides the net income by the weighted average number of shares outstanding during the period to determine the earnings allocated to each share of common stock. Understanding both types of EPS is essential for investors and analysts alike, as they offer different perspectives on a company’s financial health and help in making informed investment decisions.

It’s a straightforward way to assess profitability, as it takes the complexities of the income statement and distills it into one simple number. EPS is a simple, efficient way to analyze a company’s growth trends as well as how it compares to its peers. The P/E ratio is used to assess a stock’s valuation, while EPS evaluates profitability. They have similar limitations, but both have historically been reliable metrics for comparing companies and stocks. Moreover, EPS only considers net income and overlooks the capital required to generate earnings, market price, and stock performance, thus ignoring several other factors.