# How is Earnings Per Share Calculated and Why it Matters

When you're investing in stocks, it's important to understand how earnings per share is calculated. This figure tells you how much money the company made for each outstanding share of stock. It's a key metric that investors use to measure a company's profitability. In this guide, we'll explain how earnings per share is calculated and why it matters for stockholders.

## What is earnings per share (EPS) and how is it calculated?

EPS is the portion of a company's profit that is allocated to each outstanding share of stock. To calculate EPS, you divide the company's net income by the number of shares outstanding.

Earnings Per Share Formula = Net Income / Number of Outstanding Shares

For example, in 2021 Apple generated \$94.68 billion in net income, and the company has about 16.319 billion of shares outstanding. Therefore Apple's EPS is around \$5.8 (\$94.68 billion/16.319 billion).

## How earnings per share changes depending on the period and number of shares outstanding

Depending on the period the EPS might change. As you saw above, the EPS was calculated by taking the most recent annual net income and the number of shares outstanding. However, EPS calculations may differ depending on the number of shares outstanding that is used and the net income value which is typically the latest fiscal year data (or trailing twelve months' net income (TTM)). Let's dive into the different alternatives.

### Number of Shares Outstanding

The number of shares outstanding is typically the most recent live number which you can get by googling it or through a tool like Wisesheets, where you can get the latest number in your spreadsheet by typing =WISEPRICE("ticker", "Shares Outstanding").

However, there are cases where the weighted average shares outstanding number is used. This number is typically available on the company's income statement. You can also get it on your spreadsheet by typing =WISE("ticker", "Weighted Average Shs Out", Year).

### Different kinds of EPS

Similar to the number of shares outstanding, the net income number can greatly affect the EPS of a particular company. Typically there are three types of income that are used in this calculation: the latest fiscal year net income, the latest fiscal quarter net income, and the trailing twelve months net income (TTM). The latest fiscal year and fiscal quarter revenues can be found in the company's annual report or you can get them on your spreadsheet using the function call =WISE("ticker", "net income", "LY" or "LQ").

On the other hand, the trailing twelve net income is calculated by taking the net income values of the last 4 quarters and summing them. This provides a great measure for comparing EPS numbers across metrics without being subjected to different fiscal years or quarterly seasonal fluctuations. You can get this number by typing =WISE("ticker", "net income", "ttm").

Now you know exactly how earnings per share is calculated and the different ways that EPS values may vary. Next up we will get into why EPS as a metric matters for stock analysis.

## Why EPS is important to investors

As we stated before, EPS is a key metric that investors use to measure a company's profitability. This number tells you how much each share of stock earned for the company during a given period. A higher earnings per share figure indicates that the company is more profitable and is therefore usually associated with a higher stock price.

There are two main types of EPS that investors look at:

Basic EPS: This is the most common type of EPS and simply represents a company's net income divided by its number of shares outstanding.

Diluted EPS: This figure takes into account not only a company's ordinary shares but also other potentially dilutive securities, such as convertible bonds and stock options. This provides a more accurate picture of a company's true earnings power.

While EPS is a very useful metric, it's important to remember that it doesn't tell the whole story. For example, a high EPS figure might be the result of a buyback program (where companies repurchase their own shares to boost earnings per share) rather than strong underlying profitability. As always, it's important to do your own research before making any investment decisions.

EPS is just one metric that investors use to measure a company's profitability and potential stock price. However, it is not the only metric and should not be used in isolation. Instead, EPS should be considered alongside other measures such as revenue growth, margins, and free cash flow. Check out our article on the most important stock metrics to look at when analyzing stocks.

## How EPS can be used to measure a company's financial performance

There are a few different ways that investors can use EPS to measure a company's financial performance.

One way is to compare a company's EPS to its historical figures. This can give you an idea of how the company is performing relative to its past and whether it is improving, declining, or remaining stagnant.

Another way to use EPS is to compare it to the EPS of other companies in its industry. This can give you an idea of how profitable the company is relative to its peers and whether it has a competitive advantage.

Finally, you can also use EPS to measure a company's valuation. This is usually done by comparing a company's EPS to its price-earnings ratio (P/E ratio). A high P/E ratio indicates that investors are willing to pay more for each dollar of earnings, which suggests that the company is doing well and has a bright future. Conversely, a low P/E ratio indicates that investors are not willing to pay as much for each dollar of earnings, which may suggest that the company is not doing as well or has a less certain future.

## The pros and cons of using EPS as a stock analysis tool

Some of the main pros are that EPS is:

• Well-established metric that is widely used by investors
• Good measure of a company's profitability
• Helpful tool for comparing companies across industries

Some of the main cons are that EPS is:

• It's only one metric and should not be used in isolation
• It can be manipulated by companies through buybacks or other means
• It's not always a good measure of a company's future potential

## Some tips for interpreting EPS data

Here are a few tips to keep in mind when interpreting EPS data:

• Be sure to compare companies within the same industry when doing your analysis. This will give you a more accurate picture of how each company is performing.
• Remember that EPS is just one metric and should not be used in isolation. Instead, consider it alongside other measures such as revenue growth, margins, and free cash flow.
• Be aware that EPS can sometimes be manipulated by companies through buybacks or other means. As always, it's important to do your own research before making any investment decisions.

## Pros and cons of investing in companies with high or low EPS

Some of the main pros of investing in companies with high EPS are that they:

• Typically more profitable than their peers
• Tend to have a competitive advantage

Some of the main cons of investing in companies with high EPS are that they:

• May be overvalued by the market
• May have less room for growth

Some of the main pros of investing in companies with low EPS are that they:

• May be undervalued by the market
• May have more room for growth

Some of the main cons of investing in companies with low EPS are that they:

• Typically less profitable than their peers
• May not have a competitive advantage

## Conclusion

Investors should be aware of the pros and cons of investing in companies with high or low EPS before making any investment decisions. While companies with high EPS may be more profitable and have a competitive advantage, they may also be overvalued by the market. Companies with low EPS may have more room for growth, but they may also be less profitable than their peers. As always, it's important to do your own research before making any investment decisions.

Please let us know if you have any questions or suggestions for future articles. We can be reached at info@wisesheets.io

Happy investing!

-The Wisesheets Team

P.S If you are looking to get companies' EPS as well as countless other metrics such as ROIC, and ROE on your spreadsheet without the pain of wasting time copy-pasting the data for every company you analyze, then feel free to sign up for your Wisesheets free trial on this link.

#### Guillermo Valles

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing deals and learning the ropes.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies. That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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