Credit: Next, divide the earnings total you just calculated by the number of outstanding shares listed on the balance sheet. This will give you the EPS.
Next, divide the earnings total you just calculated by the number of outstanding shares listed on the balance sheet. This will give you the EPS.
For example, if a company's net income was $10 million, and it paid $1 million to preferred shareholders, there would be $9 million in earnings available to common shareholders. If the company had 20 million outstanding shares, the EPS could be calculated as:
Earnings per share is important to investors because it breaks down a company's profits on a per-share basis, which is especially useful for tracking performance over long time periods. Over time, a company's total number of outstanding shares can change significantly, so the total earnings may not be indicative of higher profitability for shareholders.
Why EPS is important to calculate
For example, if a company earned $10 million in 2000 and $20 million in 2010, it may appear that profitability doubled. However, during that period, if the number of outstanding shares increased from 10 million to 40 million, we can calculate that earnings per share actually declined from $1.00 to $0.50.
EPS is also used in several valuation metrics, particularly the price-to-earnings ratio, which is probably the most widely used way to compare stocks' valuations. By dividing the current share price by the earnings per share, we can get a basis for comparing the company to either its own historical valuation, or to other companies in the same industry, in order to assess whether it is expensive or fairly valued.
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