How to Calculate Earnings Per Share

Earnings per share is the allocation of a company’s net income to each outstanding common share of stock. Earnings per share is used by Wall Street & other stock market analysts to measure the profitability of a company versus another company in the same industry, plus is a way of evaluating quarterly financial results of the company. The formula for calculating Earnings per Share is:

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

Average outstanding shares is also known as the Weighted Average number of shares because since a company’s outstanding shares on the stock market change all the time, we like to use an average that represents a fair number of shares throughout the year. Some companies use the outstanding number of shares at the end of one period in order to simplify their calculations.

Calculate Earnings per Share

Here’s a hypothetical example. ZZZ Corp. has a net income of $50 million for the year ended December 31st, 2010 and has 20 million shares outstanding on the New York Stock Exchange (NYSE). The company does not have any preferred shares outstanding so it does not have to pay out any preferred dividends. What is the Earnings per Share?

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

EPS = ($50 million – $0) / 20 million shares

EPS = $2.50

Analyst Estimates on EPS

Most large cap organizations in the United States have several Wall Street analysts that closely follow the company’s earnings and business operations in order to forecast an earnings per share number. Analysts following a company like to issue EPS estimates for for the most recent quarter, the next quarter, the current fiscal year and the next fiscal year. The average of all analysts’ estimates are tabulated and a final EPS estimate is released on the financial media. Other information that comes along with EPS estimates is:

i) Number of Analysts – This indicates the number of analysts that have provided estimates for this company and are closely monitoring the business.

ii) High/Low Estimates – This provides estimates of the low end of the EPS versus the high end; generally the closer these estimates are together, the more confident you can be of the earnings estimate.