The EPS calculation involves taking the target company’s net earnings and dividing them by the firm’s outstanding shares:
EPS = Net Earnings / Outstanding Shares
Using the example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).
So, you should go ahead and buy Company A with an EPS of 10, right? Perhaps, but it’s best not to make this decision on the basis of its EPS alone.
The EPS helps when comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, you need to examine some of the company’s financial ratios, market news, and other information.
Types of EPS Numbers
Before calculating the earnings per share, it’s important to note that this equation doesn’t just refer to one figure. Rather, analysts often use three types of EPS numbers:
Trailing EPS: last year’s numbers and the only actual EPS
Current EPS: this year’s numbers, which are still projections
Forward EPS: future numbers, which are obviously projections
Knowing the various forms of EPS numbers can help you better compare stocks, but you’ll still need to do additional research to determine if any one stock is worthy of your investment.