Publicly-traded companies are required to report financial figures and follow certain accounting standards. Those reports — available on the website of the company or in the database of the SEC — must be filed in a timely fashion, not only to live up to regulations but to avoid the stock decline that comes with unexpected delays.
Generally speaking, investors look for a few key pieces of information from these reports, and one of the most influential numbers is earnings per share (EPS). Most stock analysts come up with an earnings-per-share target share; the average of those is known as the consensus or Street estimate.
If a company reports EPS below the consensus estimate, the stock could fall.
EPS is an important financial figure that helps investors, analysts and other market participants determine how the company has been performing. Earnings per share is particularly important to value investors, because it allows them to measure the company against its industry and figure out whether it’s properly priced and valued.
EPS in detail
Earnings per share, quite simply, measures a company’s net profit per share. In other words, it’s the company’s net income less dividends (if any) divided by the outstanding shares.
The formula looks like this:
Net income is a company’s profits, the amount of money a company has left from its revenues after paying its costs, operating expenses and taxes. That said, if the company is operating at a loss, it would have a negative net income or a “net loss.”
Dividends are the amount a company pays to shareholders from its earnings or retained earnings.
Total shares outstanding is exactly what it sounds like, the number of shares held by investors or other market participants. Many analysts calculate EPS using a “weighted average” of outstanding shares, which more accurately accounts for changes in the stock’s float throughout the fiscal year.
Let’s take a look at an example, in Apple Inc. (AAPL). For the second quarter of the 2017 fiscal year, Apple reported net income of $11 billion and had 5.225 billion shares outstanding. Do the math and Apple’s EPS was roughly $2.10.
That number is different from the company’s “diluted EPS,” which takes into account the total number of shares outstanding, if all convertible securities were exercised. Fully diluted, Apple had 5.26 billion shares, and a basic diluted EPS of $2.09 for Q2 2017.
EPS is just one important metric investors should pay attention to. Other financial figures to keep an eye on: revenues, cash and cash equivalents, earnings before interest, taxes, depreciation and amortization (EBITDA), and full-year guidance. Again, keep in mind these figures are not the be-all and end-all of investing, but knowing how they work and what they signal makes it easier to have confidence in your ability to understand a company’s fundamentals.