What Is the Formula for Calculating Earnings per Share EPS?

When you compare Bank of America’s P/E of almost 19x to JPMorgan’s P/E of roughly 17x, Bank of America stock does not appear as overvalued as it did when compared with the average P/E of 15 for the S&P 500. Bank of America’s higher P/E ratio might mean investors expected higher earnings growth in the future compared to JPMorgan and the overall market. The P/E ratio measures the market value of a stock compared to the company’s earnings.

  1. Public companies are required to report both their basic and diluted EPS, when relevant, in their public filings.
  2. Instead, you should aim to reach consistent growth on your investments.
  3. Typically, this consists of adding or removing components of net income that are deemed to be non-recurring.

Knowing a company’s EPS can be essential for making an informed investment decision, as a growing EPS usually leads to an increase in the stock’s price. However, it is important to consider other metrics to get a fuller understanding of the company’s health. If the stock price didn’t increase, you would have gotten a lower price-to-earnings ratio. This looks good, as you’re collecting higher interest on your investment, but again, it isn’t by itself an indication of a healthy company.

Example of P/E Ratio: Comparing Bank of America and JPMorgan Chase

The market capitalization, i.e. “equity value”, of a company following a stock split or reverse stock split should be neutral in theory. Thus, the “Net Earnings for Common Equity”—which is calculated by deducting the preferred dividend from net income—amounts to $225 million. Therefore, the potentially dilutive securities are assumed to be exercised, irrespective of whether they are “in-the-money” or “out-of-the-money”. While only the securities that are “in-the-money” were included in the past, the more conservative approach of including all (or most of) the dilutive securities is now common practice. Investors typically compare the EPS of two or more companies within the same industry to get a sense of how one company is performing relative to its peers.

The Formula for EPS Excluding Extraordinary Items Is:

It is more accurate to use a weighted average number of common shares over the reporting term because the number of shares can change over time. The calculation of diluted EPS takes into account the impact of convertible securities and employee stock options that could dilute the company’s earnings per share. So, if a company has securities that could increase the number of shares outstanding, diluted EPS will be lower than basic EPS. Earnings Per Share (EPS) is a financial metric representing the portion of a company’s profit allocated to each outstanding share of common stock. It is calculated by dividing the net income available to common shareholders by the average number of outstanding shares during a specific time period.

Since the denominator is greater in the basic EPS, the diluted EPS is always less than the basic EPS from the higher share count. Ultimately, the company’s allocation of its net earnings is a discretionary decision determined by management and the board of directors, with the goal of maximizing shareholder value. Earnings per share can be distorted, both intentionally and unintentionally, by several factors. Analysts use variations of the basic EPS formula to avoid the most common ways that EPS may be inflated. If you have an interest in stock trading or investing, your next step is to choose a broker that works for your investment style. This measurement typically includes figures from the four quarters of the current fiscal year, some of which may have already elapsed, and some of which are yet to come.

PE ratio below industry average

Although EPS is widely used as a way to track a company’s performance, shareholders do not have direct access to those profits. A portion of the earnings may be distributed as a dividend, but all or a portion of the EPS can be retained by the company. Shareholders, through their representatives on the board of directors, would have to change the portion of EPS that is distributed through dividends to access more of those profits. The earnings per share figure is especially meaningful when investors look at both historical and future EPS figures for the same company, or when they compare EPS for companies within the same industry.

Correlates with Stock Price

Most P/E ratios are calculated using the trailing EPS because it represents what actually happened, and not what might be. On the other hand, while the figure is accurate, the trailing EPS is often considered old news. The offers that appear on this site are from companies that compensate us.

Investors may use EPS to compare different companies to see how well they are doing relative to each other. Growth in earnings per share assesses a company’s long-term development. A financial metric representing the portion of a company’s profit allocated to each outstanding share of common stock. Real estate investment trusts (REITs), which are also popular among dividend investors, are required by law to pay out at least 90% of their taxable income as dividends. They get special tax breaks that help make higher payout ratios more sustainable.

Other financial metrics can also give investors a fuller view of the company and its prospects. Financial statements often include not only the basic or diluted EPS, but also a measure called adjusted EPS. When calculating EPS, sometimes investors may use the weighted average of shares at the beginning and ending period being measured (say, a full year) in the denominator to give a broader picture of EPS. Other times, investors use the number of shares at the end of the period since it’s the most current and it’s the figure that the company is moving forward with. See that the P/E ratio is relatively flat except for 2008, which was the year of the world economic crisis?

The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. To compare Bank of America’s P/E to a peer, we calculate the P/E for JPMorgan Chase & Co. (JPM) as of the end of 2017. Bank of America’s P/E at 19x was slightly definition days sales outstanding.com higher than the S&P 500, which over time trades at about 15x trailing earnings. Even if you look at EPS trends, you need to dig deeper to understand why a company’s EPS is rising or falling. Knowing a company’s EPS can be helpful when you’re investing, but it’s only one piece of the puzzle.

Although it seems like a stock that costs more relative to its EPS when compared to peers might be “overvalued,” the opposite tends to be the rule. Regardless of its historical EPS, investors are willing to pay more https://intuit-payroll.org/ for a stock if it is expected to grow or outperform its peers. In a bull market, it is normal for the stocks with the highest P/E ratios in a stock index to outperform the average of the other stocks in the index.

To determine if you are getting a good or bad P/E ratio, compare one company to another in the same sector. Even if one of the companies in the index is not accurate in terms of data, the other companies in the index will compensate. From 2002 to 2017, a clear trend emerges as the company’s EPS increases. There’s a gap in the chart due to the world economic crisis, which is common for a company chart that includes the year 2008. Overall, a tendency of growing EPS means that the company may be competitive enough to grow and expand its market share.

Short-term growth investors and speculators are particularly interested in companies whose EPS they think will beat analyst estimates, as an earnings beat can fuel a short-term rally in a stock’s price. Earnings per share (EPS) is more or less what it sounds like — a measurement of a publicly traded company’s profits on a per-share basis. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.