Earnings per share (EPS) is one of the most basic measures of profitability. It shows how much profit an organization has generated per share outstanding. While the dilution number is of interest, it is the fundamental figure that determines a company's profitability. In this article, Johnson's Blog will explain what EPS is and how to calculate it. We will also talk about its limitations and why you should use basic EPS instead of diluted EPS when making financial decisions.
What is Earnings Per Share (EPS)?
Earnings per share (EPS) is a financial metric that measures the profit a company earns per outstanding share of common stock. It is calculated by dividing net income of the company for the number of ordinary shares outstanding. EPS helps investors understand the financial performance of the company and the return they can get from their investment.
How to calculate EPS
To calculate EPS, use the following formula:
EPS = (Net Income – Dividends per preferred stock) / Number of common shares outstanding
In there:
Net income is the profit a company earns after deducting all expenses, taxes and interest.
A dividend on preferred stock is a payment to holders of preferred stock, a class of stock that takes precedence over common stock in terms of dividends and assets in the event of liquidation.
Ordinary shares outstanding is the number of ordinary shares that have been issued by a company and are held by the shareholders of the company.
Note: There are two types of EPS: basic EPS and diluted EPS. Basic EPS is calculated using the number of shares outstanding of common stock, while diluted EPS takes into account the potential for earnings dilution that may result from outstanding stock options, securities conversions and warrants.
Limitations of EPS
Earnings per share (EPS) is a widely used financial metric, but it has several limitations:
- One-way focus: EPS focuses only on a company's profits and does not consider other aspects of a company's financial performance, such as revenue, assets, liabilities, and cash flow.
- Non-GAAP Adjustment: EPS calculation may be affected by non-according adjustments GAAP, such as stock-based compensation, one-time fees, and profit/loss from discontinued operations.
- Time problems: EPS can be affected by when a company reports earnings and it may not reflect the true financial performance of the company over a longer period of time.
- Arbitrary decision: Management has full discretion in how it presents and adjusts its earnings, which may affect EPS.
- Capital Structure: EPS is calculated based on the number of common shares outstanding, but it does not consider the impact of a company's capital structure, such as debt and preferred stock, on the company's financial performance.
Therefore, it is important to consider EPS in the context of a company's overall financial performance and supplement it with other financial metrics when assessing a company's financial position.
How is EPS used?
Earnings per share (EPS) is a widely used financial metric in many ways, including:
- Evaluate the financial performance of the company: EPS is a measure of a company's profitability and is used to gauge financial performance over time.
- Compare with companies in the same industry: EPS can be used to compare the financial performance of a company with peers in the same industry or sector.
- Determine stock price: EPS can affect a company's stock price, as investors often use it as a benchmark to gauge a company's financial performance and future growth prospects.
- Calculate the price-to-earnings (P/E) ratio: The price-to-earnings (P/E) ratio is calculated by dividing a company's stock price by that company's EPS, and it's used to gauge a company's valuation and future potential. evolution.
- Make investment decisions: EPS is used by investors to make informed investment decisions, as higher EPS generally indicates a more profitable and financially stable company.
Note: EPS is just one of a number of financial metrics used to gauge a company's financial performance and should be viewed in the context of its overall financial position and growth prospects over the course of the year. company's future.
Basic EPS vs Diluted EPS
Basic earnings per share (EPS) and diluted earnings per share (EPS) are two measures of a company's earnings per common share outstanding. The difference between the two is that diluted EPS takes into account the potential for earnings dilution that may result from the issuance of additional common shares.
- Basic EPS: Basic EPS is calculated by dividing the company's net income by the number of common shares outstanding. It is a measure of a company's earnings per share without considering the impact of any potential dilution from convertible securities, stock options, and warrants.
- Diluted EPS: Diluted EPS is calculated by adjusting basic EPS to account for the possibility of earnings dilution that may result from the issuance of additional common shares. Diluted EPS provides a more conservative measure of a company's earnings per share and helps investors better understand a company's earnings potential if all options and warrants are outstanding. exercised and all convertible securities are converted into common shares.
Note: Both basic EPS and diluted EPS are important financial metrics used by investors to gauge a company's financial performance and make informed investment decisions.
Example of EPS
Here's an example of how EPS is calculated:
Assume a company has net income of $1,000,000 and has 1,000,000 shares of common stock outstanding. To calculate basic EPS, divide net income by the number of shares outstanding:
$1,000,000 1,000,000 = $1.00
So, this company's basic EPS is $1.00.
Now, suppose the company has 100,000 stock options and 50,000 convertible bonds. To calculate diluted EPS, the number of shares outstanding is adjusted to reflect the potential for additional share issuance from the exercise of the option and the conversion of the convertible bonds.
Assume the conversion price of the convertible bond is $20 and the exercise price of the stock option is $10. To calculate the number of additional shares, divide the conversion price by the strike price:
$20 $10 = 2
Thus, for each share converted and each option exercised, 2 additional shares of common stock will be issued.
Now, add the number of additional shares to the number of shares outstanding:
1,000,000 + (100,000 x 2) + (50,000 x 2) = 1,300,000
Finally, divide net income by adjusted number of shares outstanding to calculate diluted EPS:
$1,000,000 1,300,000 = $0.77
So, this company's diluted EPS is $0.77.
This example shows how diluted EPS accounts for the potential dilution of the earnings from the issue of additional shares and provides a more conservative measure of a company's earnings per share.
EPS from continuing operations
Earnings per share from going concern (EPS from going concern) is a financial metric that measures a company's earnings per share of common stock outstanding, excluding any any income or loss from discontinued operations.
Discontinuance refers to a business division or subsidiary that has been sold or otherwise terminated and is no longer part of the going concern of the company.
EPS from going concern provides a more accurate picture of a company's core earnings performance, as it removes the impact of disrupted operations and allows investors to focus on the company's ongoing business.
This metric is important to investors because it provides insights into a company's underlying financial performance and helps them make more informed investment decisions. It is also useful to compare the financial performance of a company with peers in the same industry or sector.
Note: EPS from going concern should be considered in the context of the company's overall financial health and future growth prospects, as well as the company's past performance and historical trends. .
EPS and Capital
Earnings per share (EPS) is a measure of a company's earnings per share of common stock outstanding, while capital refers to the total amount of money a company has raised from investors to fund its operations. finance the operations and growth of the company.
The relationship between EPS and capital is that EPS is one of the factors that can affect a company's ability to raise capital. If a company has a high EPS, it can be seen by investors as a more attractive investment opportunity and this can make it easier for the company to raise capital. High EPS can also increase a company's stock price, which can be an attractive proposition for investors.
However, it's important to note that EPS is just one of a number of financial metrics used by investors to gauge a company's financial performance and growth potential. Other factors such as revenue growth, debt levels and cash flow are also considered when assessing a company's ability to raise capital.
In summary, while EPS can impact a company's ability to raise capital, it is only one of many factors investors consider when assessing a company's financial performance and growth potential. company.
EPS and dividends
Earnings per share (EPS) and dividends are two important financial metrics for investors when assessing a company's financial performance and growth potential.
EPS measures a company's earnings per common share outstanding, while dividends refer to the payments a company makes to shareholders from its profits.
The relationship between EPS and dividends is that a company's ability to pay dividends is often related to its EPS. If a company has a high EPS, it may have more resources to pay dividends to shareholders. Additionally, a high EPS can boost a company's stock price, making it a more attractive investment opportunity for investors looking for both growth and income.
However, it is important to note that high EPS does not necessarily guarantee that a company will pay a dividend, as the final dividend decision is up to the company's board of directors and board of directors. Some companies may choose to reinvest their profits into the business to support growth, while others may choose to pay dividends to reward their shareholders.
EPS and dividends are two important financial metrics for investors when assessing a company's financial performance and growth potential, with high EPS often associated with dividend payout capacity.
EPS and price-to-earnings (P/E)
Earnings per share (EPS) and price-to-earnings (P/E) ratio are two important financial metrics often used by investors together when assessing a company's financial performance and growth potential.
EPS measures a company's earnings per share of common stock outstanding, while the P/E ratio is a valuation metric that compares a company's stock price to earnings per share.
The relationship between EPS ratio and P/E is a P/E ratio calculated by dividing a company's stock price by its EPS. A high P/E ratio indicates that investors are willing to pay a premium on a company's earnings, while a low P/E ratio indicates that investors are less optimistic about the company's financial performance. company.
When assessing a company's financial performance and growth potential, investors often use the P/E ratio in conjunction with other financial metrics such as revenue growth, debt levels, and cash flow to determine the overall value of the company.
In summary, EPS and P/E ratios are two important financial metrics used together by investors when assessing a company's financial performance and growth potential. provides insight into the relationship between a company's stock.
What is good EPS?
There is no universally accepted answer as to what constitutes “good” earnings per share (EPS), as the level of EPS considered “good” can vary depending on many factors, including the company's industry, size, growth prospects, and financial performance.
In general, high EPS is often considered a positive indicator of a company's financial performance, as it shows that the company is generating high profits and has the ability to pay dividends and invest in growth. .
However, it is important to consider the context in which a company's EPS is being assessed, such as past performance, historical trends, and future growth prospects. In some cases, high EPS can be attributed to one-time events or accounting changes and may not be a reliable indicator of a company's long-term financial performance.
Additionally, comparing a company's EPS with peers in the same industry or sector can provide valuable context and help investors determine if a company's EPS is "good."
In summary, while high EPS can be a positive indicator of a company's financial performance, it is just one of a number of financial metrics that investors should consider when assessing financial health. and growth potential of the company.
Epilogue
Earnings per share (EPS) is a widely used financial metric to measure a company's profitability on a per-share basis. It is calculated by dividing the company's net income by the number of common shares outstanding. EPS is commonly used by investors to gauge a company's financial performance and growth potential, and can provide valuable information about its ability to generate profits, pay dividends, and invest. on company growth. However, it is important to look at EPS in the context of other financial metrics, such as revenue growth, debt levels, and cash flow, for a comprehensive understanding of the company's financial position and growth potential. company. Please leave a comment if you have questions.
English 
Tiếng Việt