Anticipating Earnings Per Share (EPS)

As the name implies, the anticipated earnings per share gives investors a simple way to anticipate exactly what they will earn per share of stock they own. The Financial Accounting Standards Board demands that each company include in its income statements the EPS for each major category of income. These categories include continuing operations, discontinued operations, net income and any extraordinary items.

The simplest of the equations used to determine EPS is as follows:

EPS = Net Income – Dividends on Preferred Stock/Average Outstanding shares

For categories outside of continued operations or net income, the EPS formula does not include preferred dividends. Since the calculations are much more complicated in those categories, preferred dividends are removed from net income prior to the math being managed. It is also a result of preferred stock rights being higher on the totem pole than common stock. The monies set aside for preferred dividends are not used in the distribution of each share of common stock. To calculate things more accurately one uses a weighted average number of shares outstanding, which can change over time.

EPS is often considered the most important variable when share price is set. It is used to calculate price-to-earnings ratios, however, since capital is ignored in generating the figures. Companies with vastly different equity could end up with very similar earnings per share (EPS) numbers. The better choice would be the company which produced more with less equity. However, since it is possible to manipulate earning numbers more than one tool should be used to assess a stock or company.

You may also want to check out this EPS article.

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