What is Earnings Per Share? Basic EPS vs Diluted EPS

Earnings Per Share, abbreviated as EPS, indicates the ratio of a company’s net profit to its outstanding shares.

It is a financial metric used to measure the profitability of each share of a publicly traded company.

In practical application, the EPS calculation formula can be adjusted based on the company’s operating model.

For example, the profit component can be adjusted to obtain Adjusted EPS or the number of outstanding shares can be adjusted to obtain Diluted EPS, thereby providing a more accurate assessment of the profitability of a company’s publicly traded shares.

It is important to note that using EPS alone to analyze a publicly traded company is still relatively one-sided.

Other financial metrics should be used to conduct a more comprehensive analysis of a company’s operational capabilities.

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How do you calculate Earnings Per Share?

Earnings Per Share (EPS) calculates the ratio of a company’s net profit to the number of outstanding common shares, as follows:

EPS = Net Profit ➗ Number of Shares Outstanding

It is important to note that if a company has preferred stock, the dividends paid to preferred shareholders must be subtracted from the net profit when calculating EPS.

This is because the net profit must first be distributed to preferred shareholders before being distributed to common shareholders.

The EPS equation with preferred stock is modified as follows:

In the calculation, the weighted average shares outstanding is often used as the denominator:

The weighted average shares outstanding reflect the average number of shares throughout the period, accounting for changes in the number of shares, which avoids the impact of share fluctuations on EPS.

For example, if a company issued 10,000 shares at the beginning of the financial period and issued another 10,000 shares throughout the year, resulting in a total of 20,000 shares by the end of the year, and had no preferred stock, with a net profit of $200,000 for the financial year, the EPS calculation would be:

• Using the number of shares outstanding at the beginning of the year, EPS = $ 200,000 / 10,000 = $20
• Using the number of shares outstanding at the end of the year, EPS = $ 200,000 / 20,000 = $ 10

The EPS values differ significantly, so the weighted average shares outstanding should be used.

In this example, the beginning shares are 10,000 and the ending shares are 20,000, so the weighted average shares outstanding are:

(10,000+ 20,000) / 2= 15,000 shares

Thus, the EPS for the financial year is:

EPS = $200,000 / 15,000 ≈ $13.33

Three Types of Earnings Per Share

Earnings per Share (EPS) is commonly divided into three types: Basic EPS, Adjusted EPS, and Diluted EPS.

Basic Earnings Per Share

Basic earnings per share, or Basic EPS, is the net profit minus preferred dividends, divided by the weighted average number of common shares outstanding.

This has been introduced in the previous section.

Diluted Earnings Per Share

Diluted earnings per share, or Diluted EPS, considers the currently outstanding common shares and potentially outstanding shares, convertible securities, and employee stock options.

Diluted EPS is typically lower than Basic EPS because the denominator used in the calculation is larger, providing a more conservative EPS.

The formula for Diluted EPS is

Diluted EPS = (Net Profit – Preferred Stock Dividends) / Weighted Average Diluted Shares

The diluted shares include currently outstanding common shares, potentially outstanding shares, convertible securities, and employee stock options.

The weighted average diluted shares are the average of the diluted shares at the beginning and end of the period.

Adjusted Earnings Per Share

Adjusted Earnings Per Share, or Adjusted EPS, reflects the earning capability generated from the company’s core business activities.

It involves adjusting the company’s earnings (the numerator) by removing or adding non-core profits, losses, and minority interests.

The formula for Adjusted EPS is:

Adjusted EPS = (Net Profit – Preferred Stock Dividends -/+ Non-Core Profits and Losses) ➗ Weighted Average Shares Outstanding

Relations of three EPS

How to get Earnings Per Share?

EPS is typically reported in a company’s financial statements.

Let’s use Apple Inc. (AAPL) as an example, based on its annual report for September 2023:

AAPL’s earnings per share statement from its financial results is shown below (revenue in millions, shares in thousands).

Basic earnings per share and diluted earnings per share are given directly in the following financial report.

The above figure directly provides values for Basic EPS and Diluted EPS, listed below.

Meanwhile, we could get the following information.

Let’s verify the value of EPS using the given formulas.

Basic EPS = Net Profit / Weighted Average Shares Outstanding

Similarly, the weighted average number of diluted shares was 15,812,547 thousand shares, which resulted in diluted earnings per share:

Diluted EPS = Net Profit / Weighted average number of diluted shares outstanding

Using the same method, you can find the Basic EPS for the past ten years and plot it as follows:

The plot shows that Apple’s Basic EPS has been steadily increasing over the past ten years.

It’s important to note that you should not solely rely on EPS to evaluate a company. You need to consider various factors that may contribute to an increase in EPS, such as higher net income or a reduction in outstanding shares through stock buybacks.

Similarly, we can plot the changes in Diluted EPS over the past ten years:

What is the Trailing Twelve-Month Earnings Per Share?

Trailing Twelve-Month Earnings Per Share, abbreviated as TTM EPS, represents the earnings per share over the past 12 months.

To calculate TTM EPS, you need to gather the net income and the weighted average shares outstanding for the most recent four quarters from the company’s financial reports. Then, calculate the EPS for each quarter and sum them up.

So.

Basic EPS (TTM) = $1.27 + $1.47 + $2.19 + $1.53 = $6.46

What is the Significance of Studying EPS for Investments?

Earnings Per Share (EPS) is a key financial metric that primarily measures a company’s profitability.

Typically, a higher EPS indicates a stronger ability of a company to generate profits.

More importantly, the growth of a company’s stock price is often accompanied by the growth in EPS. Therefore, investing in companies with consistently growing EPS can be a good investment strategy.

However, it is crucial to note that while EPS is a very important indicator, it should not be the sole basis for making investment decisions.

You also need to consider other financial metrics, such as Return on Invested Capital and Debt-to-Equity Ratio, and other indicators to conduct a comprehensive fundamental analysis.

More Investment Guides

• What Are Non-Controlling Interests?
• What is Shareholders’ Equity?
• What is a Company’s Preferred Stock?
• What is Enterprise Value?
• What is the Profit Margin and how to calculate it?
• What is Earnings Per Share? Basic EPS vs Diluted EPS
• What is Market Capitalization?
• What is Gross Profit, Operating Profit, and Net Profit?
• What is the P/S Ratio? How to use it?
• What is the P/E Ratio? And How to use it?