Earnings per share
Calculating earnings per share
By Chris Aime, CFP®
It’s the end of earning season, and last month every morning we would come into work and see if a
company hit or missed their earnings. But how do you compare a company’s earnings from one quarter to
the next, or one year to the next? By comparing earnings per share, you can get a good idea of how the
periods stack up.
For example, the company might have earned $100,000 both quarters, but if in quarter 1 they had 1,000
shares outstanding and quarter 2, they had 2,000 shares outstanding, quarter 1 was probably a much
better quarter. Why do I say this? By taking the net earnings and dividing by the outstanding shares you
can put the earnings on even footing: EPS = Net Earnings / Outstanding Shares
In the above example, the company earned $100/share ($100,000/1000). In the second quarter they
earned $50/share ($100,000/2000).
The harder part is figuring out what “earnings” and “shares outstanding” to use.
Shares Outstanding
When figuring out shares outstanding, you can look at either basic or fully diluted shares. Basic (or
“primary”) shares are just the number of shares held by investors.
The diluted shares factor in essentially the largest quantity that could be outstanding if warrants and options
outstanding are exercised. Analysts try to use this figure because it is a more conservative number. This
number can change as the price of the stock changes, as some options may not be exercised if the stock
drops to a certain level.
Most companies will report both numbers. Typically when they announce earnings per share, they are
referring to the diluted earnings per share, but as an investor you should probably verify this.
Earnings
Like with shares outstanding, there are a couple of different numbers companies can use when they report
earnings, and the number they use can change based on whom they are reporting it to. The earnings
number they use when filling out documents for the SEC, will be completely different from the one they use
when reporting to shareholders. The two main types follow.
Reported Earnings
Companies have to report their earnings to the SEC in a standardized format following standardized rules.
These earnings are called Generally Accepted Accounting Principle earnings and are usually a good
starting point for determining how a company performed over a set period. These are the earnings stated
following the same standards that all companies must follow. However, this number can distort the earnings
based on numerous “one-time” charges. For example, if a company writes off a large loss, this will distort
the GAAP earnings for one quarter. The GAAP earnings tend to be the most volatile of the earnings due to
these instances.
Pro Forma EPS
With pro forma earnings, the company has made some assumptions to come up with an earnings number.
In the above example, they would back out the large loss to show what earnings would have looked like
had they not written off the loss. This helps an investor compare the numbers when looking for historical
trends. The issue that arises with these earnings, however, is that they can be massaged to make the
company look much better than reality. Many companies in early 2000 were touting their pro forma earnings
with a slew of one-offs because their GAAP earnings were negative.
Putting Them Together
The actual calculation for EPS is pretty simple. The more difficult part is actually coming up with the
earnings part of it. As an investor, you need to be aware of which EPS number you are looking at. Just
because a stock has a low P/E doesn’t mean it is a good value. You need to make sure the earnings reflect
the company accurately.
Chris Aime, CFP
®
Director, Wise Investor Group
Robert W. Baird & Co.
866-758-9473
Chris has more than 15 years' experience trading securities, options, municipal bonds and preferred
securities and has been with the Wise Investor Group for more than a decade. In addition to managing dayto-day operations of equity and income analysis and trading, Chris handles many of the group’s technical
needs. He received a bachelor’s degree in finance from George Mason University.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL
PLANNER™ and federally registered in the U.S., which it awards to individuals who successfully complete CFP Board’s
initial and ongoing certification requirement.
Robert W. Baird & Co. Member SIPC.