﻿ Earnings Per Share (EPS): Formula, Types, Limitations, A good EPS| POEMS

# Earnings Per Share (EPS)

Earnings per share is a term that reveals the profit made by a company that gets distributed to the stocks. As it is a crucial financial parameter, earning per share is an effective way to determine a company’s financial health. For instance, if a particular company has a high EPS, it can drive profitability. On the other hand, a low EPS means that the company is not profitable enough.

## What is Earnings Per Share (EPS)?

Simply put, earnings per share is a standard metric term that is used to value earnings per outstanding share. It indicates how much money a business will make for one share. In general, it is a term that divides the net worth of a company by the outstanding common stock.

## Earnings Per Share Formula

The simple formula to calculate earnings per share is to divide the total net income each year by the number of outstanding shares. The two best formulas for EPS calculation are:

• Earnings per share = Net Income after Tax/Total Number of Outstanding Shares
• Weighted earnings per share: (Net Income after Tax – Total Dividends)/Total Number of Outstanding Shares

## Earnings Per Share Formula Example

If company ABC has 10,00,000 as net income, and the company has common shares outstanding of 4,00,000 and needs to pay a dividend of 2,00,000, let us apply the EPS formula:

Weighted earnings per share = (Net Income after Tax – Total Dividends)/Total Number of Outstanding Shares

= (10,00,000 – 2,00,000) / 4,00,000

= 2 per share

The company’s income statement and balance sheet are reflected with EPS calculation.

## What Are the Types of EPS?

Mainly, there are five types of EPS that you need to know about. Here, are the five types along with a brief explanation.

• Reported EPS or GAAP EPS

Based on Generally Accepted Accounting Principles, this type of EPS is revealed in the SEC filings. To know about the type of EPS further, let’s understand its effect on EPS.

The EPS can go up if the earnings from one-time machinery sales are treated as GAAP operating income. Similarly, when a business venture transforms regular expenses into unusual expenses, it helps improve earnings per share.

• Ongoing EPS or Pro Forma EPS

Ongoing EPS excludes unusual one-time events from expenses based on ordinary net income. Here, the word Pro Forma means that the computing is based on certain assumptions.

• Retained EPS

This type of EPS relates to the earnings or profit that a company holds rather than distributing it to shareholders. The main motive of retained EPS is to pay existing debts in order to meet the specific needs and requirements of the business.

• Cash EPS

It is one of the most basic EPS. It reflects  a company’s financial health. It is the exact amount of cash that the company will earn in a specific period.

• Book Value EPS

In this type of EPS, the current balance sheet of a company is taken into account. The EPS is the carrying value per share and solely focuses on the balance sheet.

## Importance of Earnings Per Share

• It is helpful for investors to know whether or not they should invest in a particular company.
• It assists investors in comparing the performance of the top companies and then picking the one that will give them maximum benefit.
• It helps determine the existing and future stock value of a company.

## Limitations of EPS

• Many company owners show altered EPS to gain potential investors.
• The growth indicated by EPS is not always precise and accurate as it does not consider inflation.
• EPS calculation does not include the cash flow.

## Basic EPS vs diluted EPS

Basic EPS doesn’t consider the dilution effect of shares that might be issued by a company, whereas diluted EPS assumes all the outstanding shares that a company will issue. Basic EPS always contains the net income of a company when divided by outstanding shares. Diluted EPS is lower or equal to basic EPS that incorporates claims with no current outstanding shares.

## What is the difference between EPS and adjusted EPS?

Adjusted EPS is when an analyst makes numerator adjustments. It can add or remove the net income components. In general, the basic EPS is always higher than the adjusted EPS.

## What is a good EPS?

A good EPS  depend on factors that include:

• Current company’s performance
• Competitor’s performance
• Analysts’ expectations when they follow a stock

P/E ratio is defined as the stock price divided by earnings per share (EPS).

EPS is the net income divided by outstanding shares.

Yes, EPS means that the company will make a profit in the upcoming years. It is a positive sign for investors as they can invest in the company to gain profit in the long run.

The range of the average EPS of the S&P 500 varies from 13 to 15. The higher the multiple is, the more are the chances of overall market growth of a particular company.

Though EPS can give an idea of how well a company will perform in the upcoming years, it is not a good performance measure. The reason is that it does not consider the cost of capital. It is often manipulated with short-term actions and without considering cash flow.

## Category

### Read the Latest Market Journal

#### All-in-One Guide to Investing in China via ETFs

Published on Feb 27, 2024 56

#### Navigating the Post-Inflation Landscape in 2024: Top 10 US Markets Key Events to Look out for

Published on Feb 23, 2024 98

#### From Boom to Bust: Lessons from the Barings Bank Collapse

Published on Feb 23, 2024 29

Barings Bank was one of the oldest merchant banks in England with a long history...

#### Decoding FX CFD 2.0

Published on Feb 20, 2024 63

#### Weekly Updates 19/2/24 – 23/2/24

Published on Feb 19, 2024 88

This weekly update is designed to help you stay informed and relate economic and company...

#### Unlock Prosperity with 5 Sure-Fire Financial Instruments!

Published on Feb 14, 2024 195

In Singapore, the concept of guaranteed returns may evoke the spirit of prosperity, reminiscent perhaps...

Published on Feb 13, 2024 70

This weekly update is designed to help you stay informed and relate economic and company...

#### Decoding FX CFD

Published on Feb 7, 2024 98

The foreign exchange market commonly known as the forex or FX market, is a cornerstone...

POEMS 3 App

• Call Back

• Chat with us

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com