{"id":26885,"date":"2023-11-21T11:11:43","date_gmt":"2023-11-21T16:11:43","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=26885"},"modified":"2024-08-01T19:12:16","modified_gmt":"2024-08-02T00:12:16","slug":"earnings-per-share-formula","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/earnings-per-share-formula\/","title":{"rendered":"Earnings per Share Formula (EPS)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Earnings per Share Formula (EPS)<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/earnings-per-share-formula\/#Earnings_per_Share_Formula_EPS\">Earnings per Share Formula (EPS)<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/earnings-per-share-formula\/#Earnings_per_Share_Formula_Variations\">Earnings per Share Formula Variations<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/earnings-per-share-formula\/#Why_the_Earnings_per_Share_Formula_Can_Be_Deceptive\">Why the Earnings per Share Formula Can Be Deceptive<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/earnings-per-share-formula\/#When_the_Earnings_per_Share_Formula_is_More_Useful\">When the Earnings per Share Formula is More Useful<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Earnings_per_Share_Formula_EPS\"><\/span>Earnings per Share Formula (EPS)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<blockquote><p><strong>Earnings per Share Formula Definition:<\/strong> A company\u2019s Earnings per Share (EPS) equals its Net Income \/ Weighted Average Shares Outstanding and tells you how much in profit it\u2019s earning for each \u201cunit\u201d of ownership in the company.<\/p><\/blockquote>\n<p>If you have a public company\u2019s Income Statement, you can calculate Earnings per Share (EPS) by taking Net Income at the bottom and dividing by the weighted average share count in the period:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26886 size-full\" title=\"Earnings per Share Formula\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074700\/01-EPS-Formula.jpg\" alt=\"Earnings per Share Formula\" width=\"1435\" height=\"1145\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074700\/01-EPS-Formula.jpg 1435w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074700\/01-EPS-Formula-300x239.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074700\/01-EPS-Formula-1024x817.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074700\/01-EPS-Formula-768x613.jpg 768w\" sizes=\"(max-width: 1435px) 100vw, 1435px\" \/><\/p>\n<p>\u201c<a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/\" target=\"_blank\" rel=\"noopener\">Net Income<\/a>\u201d measures the <strong>after-tax profits<\/strong> the company generates from its business operations, side activities, and financial activities, such as paying interest on debt and earning interest income on investments.<\/p>\n<p>You should use the\u00a0Net Income\u00a0<em>after<\/em> the deductions for Net Income to <a href=\"https:\/\/mergersandinquisitions.com\/noncontrolling-interests\/\" target=\"_blank\" rel=\"noopener\">Noncontrolling Interests<\/a>, Preferred Dividends, etc., (if they exist) because none of these go to to the <strong>common shareholders<\/strong> of the company.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>An easy way to remember this is that you should always use the\u00a0<strong>bottom-most Net Income figure<\/strong> on the Income Statement to calculate EPS.<\/p>\n<p>Investors often focus on the Earnings per Share metric and favor companies with higher EPS figures that are also growing their EPS more quickly over time.<\/p>\n<p>They often use the EPS number to calculate <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/valuation-multiples\/\" target=\"_blank\" rel=\"noopener\">valuation multiples<\/a> such as the Price \/ Earnings or P \/ E multiple, which equals a company\u2019s Share Price divided by its EPS.<\/p>\n<p>Unfortunately, EPS is also a deceptive metric that companies can easily distort, and it\u2019s more useful for evaluating <em>mergers and acquisitions<\/em>, not company valuations.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Earnings_per_Share_Formula_Variations\"><\/span><strong>Earnings per Share Formula Variations<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In addition to the simple Earnings per Share formula shown above, there are many variations.<\/p>\n<p>For example, you might calculate <strong>Basic EPS<\/strong>, which is based on just the company\u2019s common shares outstanding, or you might calculate <strong>Diluted EPS<\/strong>.<\/p>\n<p>Diluted EPS also includes the impact of<strong> dilutive securities<\/strong>, such as stock options and warrants, that might eventually \u201cturn into\u201d common shares.<\/p>\n<p>For example, if the company has 100 common shares, employee stock options that could turn into 10 shares, and warrants that could turn into 5 shares:<\/p>\n<p>-The Basic EPS would be based on the 100 common shares.<\/p>\n<p>-And the Diluted EPS would be based on the 115 diluted shares.<\/p>\n<p>Here&#8217;s a simple example from 3M&#8217;s financial statements:<\/p>\n<p><img decoding=\"async\" class=\"alignnone wp-image-26887 size-full\" title=\"Basic vs. Diluted EPS\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074659\/02-Basic-vs-Diluted-EPS.jpg\" alt=\"Basic vs. Diluted EPS\" width=\"1476\" height=\"1145\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074659\/02-Basic-vs-Diluted-EPS.jpg 1476w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074659\/02-Basic-vs-Diluted-EPS-300x233.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074659\/02-Basic-vs-Diluted-EPS-1024x794.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074659\/02-Basic-vs-Diluted-EPS-768x596.jpg 768w\" sizes=\"(max-width: 1476px) 100vw, 1476px\" \/><\/p>\n<p>You can also calculate EPS on a <strong>trailing<\/strong> (historical) basis or <strong>forward<\/strong> (projected) basis:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-26888 size-full\" title=\"Historical vs. Projected Earnings per Share\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/03-Historical-Projected-EPS.jpg\" alt=\"Historical vs. Projected Earnings per Share\" width=\"1755\" height=\"1004\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/03-Historical-Projected-EPS.jpg 1755w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/03-Historical-Projected-EPS-300x172.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/03-Historical-Projected-EPS-1024x586.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/03-Historical-Projected-EPS-768x439.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/03-Historical-Projected-EPS-1536x879.jpg 1536w\" sizes=\"(max-width: 1755px) 100vw, 1755px\" \/><\/p>\n<p>You could also calculate the \u201cGAAP\u201d (Generally Accepted Accounting Principles) EPS or the \u201cPro-Forma EPS\u201d that excludes non-recurring and unusual expenses:<\/p>\n<p><img decoding=\"async\" class=\"alignnone wp-image-26889 size-full\" title=\"Pro-Forma vs. GAAP EPS\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/04-Pro-Forma-EPS.jpg\" alt=\"Pro-Forma vs. GAAP EPS\" width=\"1454\" height=\"564\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/04-Pro-Forma-EPS.jpg 1454w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/04-Pro-Forma-EPS-300x116.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/04-Pro-Forma-EPS-1024x397.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2023\/11\/19074658\/04-Pro-Forma-EPS-768x298.jpg 768w\" sizes=\"(max-width: 1454px) 100vw, 1454px\" \/><\/p>\n<p>The most important point here is <strong>consistency<\/strong>: You should always use <strong>the same metrics<\/strong> to compare companies.<\/p>\n<p>So, if you calculate the Diluted EPS in a company\u2019s most recent historical year, you should also calculate the Diluted EPS in the most recent year for other companies you are analyzing.<\/p>\n<p>Don\u2019t mix and match different EPS metrics, or you won\u2019t be able to make meaningful comparisons.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_the_Earnings_per_Share_Formula_Can_Be_Deceptive\"><\/span><strong>Why the Earnings per Share Formula Can Be Deceptive<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The biggest problem with EPS is that <strong>companies can easily distort the numbers<\/strong>:<\/p>\n<p><strong>1) Accounting Gimmicks<\/strong> \u2013 For example, companies could \u201csandbag\u201d their Net Income in one period by increasing their provisions or allowances or shifting around expenses. Then, the company will look better in the future because it\u2019s starting from a lower baseline EPS.<\/p>\n<p><strong>2) Stock Repurchases<\/strong> \u2013 When companies have no other ideas for their huge Cash balances, they <em>love<\/em> to repurchase stock. Doing this lets them artificially boost their EPS by reducing the \u201cShares Outstanding\u201d in the denominator \u2013 even if their core business has not grown at all.<\/p>\n<p><strong>3) Stock Splits and Reverse Splits<\/strong> \u2013 If a company decides to increase or reduce its share count with a 2:1 or 1:2 split (for example), these will also affect the Share Count in the EPS denominator, and you\u2019ll have to adjust all the historical EPS metrics for a proper comparison.<\/p>\n<p>If you want to <strong>value companies<\/strong>, you should focus on metrics that are less subject to manipulation, such as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/\" target=\"_blank\" rel=\"noopener\">EBITDA<\/a>, EBITDA minus CapEx, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow<\/a>, or <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow<\/a>.<\/p>\n<p>These metrics have their advantages and disadvantages, but they are all more reliable than the simple Earnings per Share Formula.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"When_the_Earnings_per_Share_Formula_is_More_Useful\"><\/span><strong>When the Earnings per Share Formula is More Useful<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Many articles and online sources describe EPS in relation to accounting and valuation, but in real life, it&#8217;s the <strong>most useful<\/strong> for assessing mergers and acquisitions.<\/p>\n<p>If an acquirer\u2019s EPS increases after it acquires another company, the deal is <strong>accretive<\/strong>, and if it decreases, the deal is <strong>dilutive<\/strong>.<\/p>\n<p>We have a full <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/merger-model-walkthrough\/\" target=\"_blank\" rel=\"noopener\">merger model walkthrough<\/a> that explains the mechanics, but, in short: When a company wants to acquire another company, the Board of Directors is more likely to approve the deal if it is <strong>accretive<\/strong>.<\/p>\n<p>Public companies focus very heavily on their EPS, as higher EPS numbers and more EPS growth please their shareholders.<\/p>\n<p>So, the EPS calculation can give you a quick idea of whether a deal is likely to be approved by both companies.<\/p>\n<p><strong>Also, EPS reflects every single possible funding source for an acquisition:<\/strong> Cash, Debt, and Stock.<\/p>\n<p>An acquirer could use any of these to pay for an acquisition, and they each have different effects.<\/p>\n<p>If it uses Cash, it will lose some interest income in the future (\u201cForegone Interest on Cash\u201d); if it uses Debt, it will have to pay additional interest expense in the future; and if it uses Stock, its Shares Outstanding will increase.<\/p>\n<p>Each of these &#8211; Foregone Interest, Additional Interest on Debt, and Stock Issuances &#8211;\u00a0<strong>reduces the acquirer&#8217;s EPS<\/strong>, but they do so to different degrees, depending on the company&#8217;s stock price and interest rates.<\/p>\n<p>Therefore, EPS is useful in an M&amp;A context because it lets you evaluate the \u201cfull impact\u201d of an acquisition.<\/p>\n<p>Metrics such as Pre-Tax Income and Net Income reflect only <em>some<\/em> of this acquisition funding, so they are less comprehensive than EPS.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A company\u2019s Earnings per Share (EPS) equals its Net Income to Common \/ Weighted Average Shares Outstanding and tells you how much in profit it\u2019s earning for each \u201cunit\u201d of ownership in the company. You can easily calculate it for public companies, and you can use it to create valuation multiples, such as the P \/ E multiple. But it is more useful when analyzing mergers and acquisitions and determining if a deal is accretive or dilutive.<\/p>\n","protected":false},"featured_media":29314,"template":"","class_list":["post-26885","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/26885","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/29314"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=26885"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}