Earnings Per Share (EPS)

Earnings per share (EPS) is a useful figure that can be found on a company's results. EPS can be used to calculate ratios such as the PE Ratio along with other metrics. For that reason, it is important to understand it, how different EPS figures are different, and how to properly use the EPS figure. EPS is effectively a measure of a company's profitability thus it is widely used.

To start, there are three pieces of information that you need (for a particular company)
1. The number of shares in issue
2. The total value of dividends on preferred stock (if there are no dividends, leave this out)
3. The company's net income figure
The calculation is:
 
EPS = Net Income - Dividends on preferred stock
# of Shares in Issue
 
There is however an important distinguishment that needs to be made, and that is between Basic EPS and Diluted EPS. There is in fact little difference between these two terms - the difference lies in point 1 (i.e. the number of shares in issue):
 
- Basic EPS uses the number of shares in issue at the current point in time
- Diluted EPS, as the name suggests, uses the number of shares in issue should all outstanding options and other potentially dilutive issues are taken into account
 
For that reason, the Diluted EPS will be lower than the Basic EPS - some companies may only choose to list the Basic EPS in their accounts. That may be because there are no warrants/options etc. in issue or for simplicity. Therefore, when using the EPS figures, choose the one that is most suited to the company. If it is likely that a large number of options will be exercised in the coming months, use the Diluted EPS, and if not, use the Basic EPS.  An EPS can be either positive or negative although the higher the EPS, relative to the share price, the better. A strong year-on-year EPS percentage growth is one factor you should look for if you are interested in value investing.
 
There is a third type of EPS which is often listed as 'Adjusted EPS'. This will not take into account exceptional (one-off) costs such as the cost of restructuring a business. It is 'adjusted' to not take this into account - it therefore presents a better view of the underlying business performance. It is also worth noting that if the number of shares in issue fluctuates too much to retrieve a fair EPS, then a weighted average number of shares is used. However, for simplicity, this tutorial will assume that the number does not fluctuate much and thus the outstanding number will suffice.
 
An Example Calculation - Triad Group (LSE:TRD)
 
Seeing as companies usually provide the EPS values themselves, there is little point spending a lot of time trying to see whether the figures check out - understanding how to estimate EPS figures is far more useful. Nonetheless, I will run over an example using Triad as an example. 

It is important to find the exact number of shares in issue when completing EPS calculations, not estimates. Via Triad's website, I have found that there are 15,149,579 shares currently in issue. In the last set of results I have also identified that there are no extra options, warrants or convertible debts.

The second point is the income. The relevant figure is shown at the bottom of a company's 'Consolidated Income Statement' on the right. In this case, the figure is £28,000, a small profit. Triad does not issue dividends either.
 
Using the formula pointed out earlier, we can therefore calculate the Basic EPS (the Diluted EPS will be the same).
 
Triad EPS = (28000 - 0) ÷ 15149579
= £0.001848
= 0.18p (2dp)
 
That figure tallies with the figure the company has provided. To predict future EPS' you therefore need to estimate values for both the Net Income and whether there are any dividends. You can do this via looking at historic figures for these two points or through another method such as estimating values for all the factors that make up the Net Income. For example, if you predict (these figures are unrelated to Triad) a FY 2014 profit of £100,000 with no dividends and a 1,000,000 shares issue you will do the following calculation: (100000 - 0) ÷ 16149579 = 0.62p. You can then use this to predict forward PE Ratios using the share price.

Other Points to Note

EPS figures are not only provided in a company's final results - they are also posted at half yearly intervals and may also be reported quarterly if the business chooses to. Therefore, you can use the half yearly figures to predict full year outcomes. You can do this on a purely symmetrical basis (i.e. take the H1 figure and double it) for simplicity, or if the company has a seasonal bias you can apply a weighting based on historic H1:H2 ratios.

It is also important to recognise that EPS is only really useful with businesses who generate income on a consistent basis. By that I mean that you should not bother with EPS for Oil & Gas or Mining companies (for example), as this does not really have a main influence on the share price. Rather use this for companies with sales of goods, such as Retailers and Technology Hardware companies.

Also be wary when some companies post an anomalously high Basic/Diluted EPS figure. A common cause for that may be related to a gain from an exceptional item such as proceeds from a sale of a building. In those cases, look for the adjusted EPS.

An Extract from Harvey Nash's 2013 H1 Results
An example of the converse is above. The bold figures are the H1 2013 results with the non-bold figures on the far right, the H1 2012 results. On the face of the normal Basic/Diluted EPS figures, you could come to the conclusion that Harvey Nash has not performed well compared to last year. However, the adjusted EPS have been provided. Looking back earlier in the results, that is because the company incurred a £2.2m restructuring and property reorganisation charge. Those are exceptional (one-off costs). Therefore, the adjusted EPS figures are more useful, and whilst Harvey Nash has still performed worse than last year (3.75p < 3.95p), the picture is not as bad as it initially seems. Some investors will miss this and sell upon the news, in which case it is possible for more knowledgeable investors to capitalise upon it.

A Final Issue

As EPS is based on Net Income, it can actually be manipulated. That is why you should only use EPS along with a range of other metrics. Some companies may delay payments or expenditure to artificially inflate the EPS figure. It is therefore imperative that you read the Note that relates to the EPS section - that is normally indicated by a number within a table. Also, regarding delayed payments, check the value of the 'Trade Payables'. If that figure is higher than normal, or 'Trade Receivables' are lower than normal and EPS is higher than normal, then it could simply be down to the fluctuations rather than an improved underlying performance. Finally, it is worth checking whether the accounting policy has been altered. If so, that is likely to impact the EPS.