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eps explained

Earnings Per Share Meaning & How To Calculate EPS | Moby

fundamentals Dec 13, 2021

What is EPS? Whether or not you even know what this term is, we're here today to give the Moby version of what EPS (earning-per-share) means.

Our definition will use real world examples and break it down in a way that you can't find anywhere else!

So with that context, lets get into it 👇


What does earning-per-share mean?

So what is eps? EPS simply stands for earnings-per-share.

In the context of investing and analyzing companies, any company's EPS is their earnings per share. It may sound simple to some, but let's use an example to get to the true nature of eps meaning.

So if Nike has earnings of $100, and has 50 shares outstanding, their EPS is 2! Comparatively if Adidas had earnings of $200 but had 200 shares outstanding, their EPS would be only 1.

So even with a higher earnings, their EPS is less because they have more shares outstanding.

Now, this is important because eps allows us to understand how much value we're getting as investors. This is over-simplifying it but the higher the EPS the more earnings we're getting per share.

And we can use these numbers to understand how a company is progressing over time from an earnings perspective. If the company also issues/buys back more shares, we can see that EPS will be artificially changed.

Long story short EPS is a super important number to watch relative to stock prices to help understand if a company is over or undervalued.

So if you were wondering what is EPS or what is the eps meaning, we our version of eps explained helped.

But this isn't just the entire story, as investors we also need to know how to calculate EPS, understand what is a good vs. bad EPS and finally what the difference between EPS vs Adjusted EPS means. Let's get into it below.


Earnings Per Share Formula & Calculation:

The earnings per share formula is just net income (subtracting any preferred dividends from a company's net income) divided by a companies shares outstanding. Net income is the amount of money that remains after all cash and non-cash expenses are deducted from the companies income statements.

The eps calculation is pretty straightforward but this number may prove to be difficult for some because shares outstanding can be diluted vs non-diluted (more on this below) and a lot of younger growth companies don't have earnings!

So if you're wondering where to find earnings per share, now you can just do the eps calculation yourself!

So when trying to find out how to find eps of a stock, let's first focus on the Nike example all over again -- recalling that the earnings per share formula is just earnings divided by a companies shares outstanding.

So with Nike -- to find out earnings, we'd look at their most recent earnings report or use free resources like yahoo finance or the SEC's website to find these numbers.

But be careful because this can be quoted as quarterly or annual depending on the time frame used. Additionally, watch out to see if you're using historical numbers or projected numbers!

Looking up earnings is actually a bit more difficult than you'd think, but just make sure you have the context for the company you're analyzing.

Additionally, shares outstanding are changing all the time as companies often issue new shares or buy back existing ones. Therefore a company's EPS can change all the time even if their earnings aren't changing. So if there are big differences in earnings, you need to be aware of this. Companies intentionally are always trying to make their financials look better so that they receive investment.

So now that we've gone over the eps calculation and the earnings per share formula, let's now discuss how to use these numbers and understand what's a good vs. bad EPS.


What Is a Good EPS For a Stock?

So now that you truly understand EPS, you may be wondering, "what is a good eps for a stock or what is a good eps number or even is high eps good?" Well we're here to help clear up the confusion.

Remember above that we mentioned that companies can constantly manipulate their shares outstanding -- thus affecting their EPS. Well that's not the only thing they can change -- net income is a massive line item subject to manipulation.

This is because net income includes non-cash charges like deprecation, amortization & interest. These three items are highly changeable by companies in order to manipulate investors!

Therefore as good investors, we need to look for changes in EPS rather than the raw EPS alone. So is a high eps good? Not necessarily, changes are what is important.

By analyzing growth rates or decays in growth, we can see how a company is progressing. But again take this with a grain of salt -- EPS is easily manipulated.

So what is a good eps for a stock and what is a good eps number? It shockingly doesn't matter!

Now that you're almost an expert on EPS let's make sure we quickly talk about the different types of EPS -- basic vs diluted EPS.


Basic vs Diluted EPS

Yes, just when you thought you we're done we hit you with a new term! Everything we discussed above was basic earnings per share. 

But now we're talking basic earnings per share vs. diluted earnings per share. Diluted earnings per share is basic earnings per share PLUS accounting for all potential shares outstanding.

Remember above we said to not include shares like preferred shares but with diluted we're using these shares plus things like convertible debt and employee stock options.

This is important because diluted earnings per share takes into account what would happen if everyone converted their shares - this is the potential shares outstanding -- hence the dilution.

So earnings per share basic vs diluted just carries this small difference! Now you know the difference between basic vs diluted eps.



EPS vs Adjusted EPS

And now the last part is discussing eps vs adjusted eps. The section above discussed how shares can be different.

But in this section we talked about net income (or earnings) can be different! 

The adjusted earnings definition is just when companies report earnings on an adjusted eps basis.

Basically if a company reports normal net income, this includes net income that has things like: one-time profits and expenses, sales of business units or losses from natural disasters and more.

With adjusted eps, companies factor out this extraneous items because they're one off's and not "normal". They do this so you have a better sense of the true operating nature of the company rather than factoring in one-off events.

And now you're done.

EPS is explained and you're a genius but maybe half brain dead. We hope you enjoyed!