What is the Definition of the EPS Formula & how can you use it?
The earnings per share formula, is a formula or a ratio that is used in the stock market in order to calculate the profitability of a company. It is used by investors and potential investors of a company in order to help them make a prediction on which share of the company’s net profits they will be getting that year. We’ll take a look at the earnings per share definition, as well as other points surrounding the formula.
The earnings per share value (the result of the eps formula being executed) will show anyone that calculates it how much of their profit that a company has dedicated to its outstanding shares. An outstanding share is the stocks of a company that are being held by shareholders that have purchased them. Outstanding shares are also known as capital stock and shares outstanding.
The earnings per share value itself is not exactly a useful one however if you were only calculating it for one company. It is best to calculate earnings per share for a number of companies before you make a decision on where you are going to put your investment. It is also a good idea that, when calculating the earnings per share value for a number of companies, that you make sure that you calculate it for companies that are in a similar sector or industry if you are going to be using the value to help make your investment decision. This is because different earnings per share values are different in different sectors, with some sectors of industry being inevitably more profitable than others. If you were to compare two companies that were the same or similar and that were in the same sectors, and the second one were to produce a much higher earnings per share value, the chances are that this would make for the better investment as its earnings per share result is indicative that it is the more profitable company of the two.
Let’s have a look at how you can go about using the earnings per share company to calculate the profitability of a company to help out your trading decision. If you are looking at the net income of a company, the total number of outstanding shares that the company has, as well as how much it paid out to its shareholders, then you have everything you need to calculate the eps value of the company! Let’s say for this example that the company has a net profit of $4 million, and that they are paying out a further $1.5 million to their shareholders that financial term. Let’s also say that they have half a million shares outstanding. In order to calculate the earnings per share value, we must divide the bet profits of the company after they have paid their shareholders by the number of outstanding shares that they have in total. The earnings per share value would be calculated as in the following example for this organisation:
$4million (the net profits of the company) – $1.5million (what they are paying back to their shareholders = $2.5 million
$2.5 million / 0.5million (totally shares that are outstanding) = $5
This figure shows that this company has an earnings per share value of $5 per share. Say this were to be compared to another similar company that had an earnings per share value of $3.40 per share, then this would indicate that the first company is most likely the better investment as they have a greater profitability and therefore a greater chance of being profitable in the future – meaning a return on investment for shareholders! There is also a version of the earnings per share formula that considers the net dividends of the company in its calculation before the division by the total number of shares outstanding. This can provide a more accurate earnings per share value for the company, and is used by many investors as well.
The earnings per share calculation comes in a number of different variations – each of which exist to calculate the earnings per share value of a company for a different period of time, and each of which can provide extremely useful information to shareholders or potential shareholders before they make an investment in a company.
The current EPS: The current earnings per share value uses the current profit or loss figures for a company, as well as their current figures with regard to the number of outstanding shares that they have, and the total amount that they paid to their shareholders in the current/just past financial period. The current earnings per share value is one of the most commonly used variations of the formula, and can be used by investors that would like to examine the profitability of the company at the present time, usually before they make an investment. The current earnings per share formula can provide useful insight for an investor that is looking to make something back on their investment in the coming year, financial period, or near future. The current EPS is based on current values as well as partial prediction (the predictions being for the remainder of the financial period).
The trailing EPS: the trailing earnings per share calculation allows the investor that is executing it to put into the formula any values that they would like from a previous financial period of the company’s. This is a helpful value to know as I can allow them to examine how the earnings per share value of that company has fluctuated over the years and also to identify events in the company’s sectors that cause these fluctuations. This is invaluable knowledge, as they will know of similar events surrounding the company to look out for, and will therefore be in a better position for predicting how the share value of the company will change.
The forward EPS: the forward EPS is based on the future of the company. This calculation uses only predictions, and for this reason can be either accurate or inaccurate. These predictions could be made either by the organisation, or by analysts in the stock market.