Business, Legal & Accounting Glossary
The portion of a company’s profit allocated to each outstanding share of common stock.
Calculated as earnings for ordinary shareholders divided by the number of shares which have been issued by the company.
Earnings per share is a company’s profit divided by the number of common stock shares it has outstanding. EPS shows how much money a company makes for each share of its stock. A higher EPS indicates more value because investors will pay more for a company with higher profits.
A company’s earnings per share (EPS) is determined by dividing the company’s profits by the number of shares that a company has outstanding. If a company has a profit of $10 million and has 20 million outstanding shares, then the company’s earnings per share is fifty cents ($0.50). Since the number of shares that a company has outstanding can vary from day to day, earnings per share are often calculated from an average of the outstanding shares for a reporting period. Earnings per share can be used to help determine a company’s performance; if earnings per share is growing at a relatively rapid rate then an investor might consider buying the stock, and if earnings per share is declining then it might be time to sell. Earnings per share is often used to help determine a company’s value. For example, a company’s price-to-earnings ratio is calculated by dividing the stock price by the company’s earnings per share.
Earnings per share (EPS) is found by taking the net income and dividing it by the basic or diluted number of shares outstanding, as reported. If you do this for each quarter and then add them up, you’ll get the trailing EPS. (Trailing means last 12 months or, actually, four quarters.) This is part of the input in the price to earnings (P/E) ratio. One can also take “expected” earnings for the current year or for future years to calculate other P/E ratios.
EPS is one of many things that can be used as a basis for determining an “intrinsic value” for a stock.
It is a GAAP measure and, because it’s based on net income, is somewhat easily manipulated.
“Fully diluted” means that the earnings were calculated assuming that all outstands convertible shares or options were converted to the maximum allowed number of shares of common stock. Hence, the fully diluted earnings number will usually be lower than the basic number.
Many companies provide estimates of how much they expect to earn for the current quarter as well as the current year. Wall Street analysts pay very close attention to this “guidance,” as it is known. From that, they’ll run some mathematical models of their own and come up with an estimate of EPS. When several different analysts do this for the same company, the average or “consensus” estimate is reported. Be careful, though, if there are only a few analysts contributing to this average, as they could be very far apart from each other and the average. For instance, one analyst might say $0.20 per share, while another would say $0.40 per share, twice as much. But the consensus would be $0.30 per share.
When a company reports its quarterly results, people quickly concentrate on the bottom line, the EPS. If the company “beats expectations,” that means the EPS happened to be above the consensus (average) prediction. If it “missed earnings,” that means the EPS was below the consensus. And, of course, if they “met expectations,” the consensus and the actual EPS happened to be the same.
Wall Street likes beats or, at worst, meeting expectations. A company that can consistently do this will be rewarded with analyst upgrades and a higher stock price. A company that misses expectations will often see the stock price drop drastically.
Because EPS is, essentially, net income, it is fairly easily manipulated. Management has control over the timing of some expenses and some revenue, and can therefore adjust the EPS number. General Electric (GE), for instance, met earnings or beat by one or two cents per share for something like 38 quarters in a row during the late 1990s and early 2000s. Considering the vagaries of business, this performance is suspicious.
Accounting rules usually require that any change in the assets of a company must appear in its earnings statement. Investors are most interested in the earnings due to continuing operations, but adjustments to earnings can include tax refunds, settlements from lawsuits or insurance settlements, sale of business lines or other assets, changes in accounting methods (LIFO to FIFO), currency gains or losses, investment income, etc, etc. Those who rely on earnings numbers need to read accounting statements and their footnotes carefully. Some, most notably Standard & Poor’s, try to adjust the earnings figures they record from as reported to continuing earnings. But that process is not always straightforward. Investors need to be aware of these aspects.
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This glossary post was last updated: 5th August, 2021 | 9 Views.