Earnings per Share (EPS) Calculation

When deciding on the investment in certain stocks, many times investors are facing the challenge of comparing stocks from different industries and types. This is especially hard when the investor has to choose from stocks that differ a lot.

Many investors make the fundamental mistake of comparing stocks by their price. However, this is absolutely pointless.

Another mistake that investors commit when they compare stocks is to use their earnings as a basis for evaluation. However, this method is also meaningless since even if the two companies have equal earnings, they may have different number of shares outstanding at the same time. As you can see it will be difficult to decide on which stocks to own just based on this information.

On the other hand, a more useful tool for comparison can be earnings per share or EPS.

Earnings Per Share (EPS) Calculation

EPS is calculated by the following formula:

EPS = Net Earnings / Number of Outstanding Shares

Let's consider the following example to make it clearer. Company X has 15 shares outstanding, whereas company Y has 55 shares outstanding. Both of them have earnings amounting to $150. If we use the formula given above, then the EPS for company X will be 10, which is calculated by dividing $150 by 15. On the other hand, the EPS for company Y will be 2.7, which is calculated by dividing $150 by 55.

If the two companies are from one and the same industry using the EPS may give you some idea on whether to purchase stocks of company X or company Y. Having in mind the results above, it will be better to purchase stocks of company X. However, you should not base your decision just on these numbers. This is so since they don't tell you how good the stock is or how the market will influence it.

Types of EPS

There are several types of EPS. They are as follows:

• Trailing EPS - it includes numbers from the previous year and represents the only actual EPS
• Current EPS - it includes numbers from the current year, but which represent projections for the stocks.
• Forward EPS - it includes projection numbers.

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