The EPS (earnings per share) is an important financial metric, which indicates a company's profitability. It describes a company’s earnings per outstanding share of stock. The EPS is calculated on an annual or quarterly basis.
The EPS is determined by dividing the company’s net profit by the end-of-period common shares outstanding. A company’s EPS is usually adjusted for potential share dilution and extraordinary items. A low EPS denotes that the company is less profitable and has lower profits to distribute to shareholders. The stock price often rises when a company is profiting from its product or services.
What is EPS growth?
EPS growth represents EPS growth over time. The EPS growth rate helps investors find stocks that are decreasing or increasing in profitability. For example, if a company has an EPS of $15 in 2018 and an EPS of $20 in 2019, the company has an EPS growth rate of $20/$15 - 1 = 33.3 percent during fiscal year 2019.
Stocks with slower EPS growth rates are usually less desirable than those with higher EPS growth rates. If a company has high EPS, it denotes that it has more funds available to either distribute to shareholders in the form of dividends or reinvest in the business. The EPS growth rates consider the dilution effects from new stock issuance, the exercise of warrants, employee stock options, share repurchases, and convertible securities.
What is the EPS formula?
The EPS is calculated by dividing the company’s net income by the available shares. To calculate a company’s EPS, the income statement and balance sheet are used to find the dividends paid on preferred stock (if any), the net income, and the period-end number of common shares. A company's EPS is determined using the following formula:
EPS = (Net Income − Preferred Dividends) / End-of-Period Common Shares Outstanding
For example, if a company's net income was $20 million and it paid $2 million dividends to preferred shareholders, there would be about $18 million in earnings available to common shareholders. If the company had 10 million outstanding common shares, the EPS could be calculated as:
EPS = ($20–$2) / 10 = $1.8
EPS versus dividend
DPS (dividends per share) and the EPS are both financial ratios that reflect a company’s profitability. While DPS measures the portion of a company’s profit that is paid out to shareholders, EPS measures how profitable a company is per share of its common stock.
A firm's DPS is determined using the following formula:
DPS = (Total dividends paid out over a period – any special dividends) / outstanding shares of the company
For example, assume a company paid a total of $200,000 in dividends over the last year, during which there was a special dividend totaling $50,000. If the company had 1 million outstanding shares, the DPS could be calculated as:
DPS = ($200,000-$50,000) / 1,000,000 = $0.15
An increasing DPS is a great way for a corporation to indicate strong performance to its shareholders. For example, Walmart has increased its annual cash dividend every year since it first announced a $0.05 dividend payout in March 1974.