A Primer on How to Calculate Earnings Per Share
It's not as hard as you think
If you want to compare stocks, it's helpful to know how to calculate earnings per share. That's because one of the challenges of evaluating stocks is establishing an “apples to apples” comparison. This entails setting up a meaningful comparison so that the results help you make an investment decision.
With this brief overview, learn how to get a more complete picture of two stocks by computing the earnings per share.
Why Comparing Stock Prices Doesn't Work
Simply comparing the price of two stocks is meaningless, which the article “Why Per-Share Price is Not Important” points out. Similarly, comparing the earnings of one company to another really doesn’t make sense, if you think about it. Using the raw numbers ignores the fact that the two companies undoubtedly have a different number of outstanding shares.
For example, let's say that companies A and B both earn $100. But company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?
It makes more sense to look at earnings per share (EPS) for use as a comparison tool. This calculation is not difficult to figure out. You just take the net earnings and divide them by the outstanding shares.
Determining Earnings Per Share
The equation to figure out earnings per share is simple. Just remember that EPS = Net Earnings / Outstanding Shares.
Using the example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).
So, you should go ahead and buy Company A with an EPS of 10, right? Perhaps, but you should not make this decision just on the basis of its EPS.
The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, you need to examine some ratios.
Types of EPS Numbers
Before calculating the earnings per share, it's important to note that this equation doesn't just refer to one figure. Rather, there are three types of EPS numbers:
- Trailing EPS – last year’s numbers and the only actual EPS
- Current EPS – this year’s numbers, which are still projections
- Forward EPS – future numbers, which are obviously projections
Knowing the various forms of EPS numbers can help you better compare stocks, but you'll still need to do additional research to determine if any one stock is worthy of your investment.
To learn more more about EPS and investments, consult the rest of the articles in this series. They are as follows:
- Earnings per Share – EPS
- Price to Earnings Ratio – P/E
- Projected Earning Growth – PEG
- Price to Sales – P/S
- Price to Book – P/B
- Dividend Payout Ratio
- Dividend Yield
- Book Value
- Return on Equity
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