Calculate the earnings per share

Problem of the day….
•Property accepted as
security for a loan is
Problem of the day…
•A check card is
another name for a:
Problem of the day….
•The outstanding balance
of a loan, not counting
interest and other
charges, is called the:
Percentage Increase or Decrease
• An individuals stock portfolio is currently
worth $44,000. The original investment was
$30,000. What is the percentage increase or
decrease of this investment?
• N–O/O
44,000 – 30,000 = 14,000 / 30,000 = Increase of
Calculate the earnings per share and
price to earnings ratio
EPS = Net Income/ Average
outstanding Shares
• Earnings per Share is the allocation of a
company's net income to each outstanding
common share of stock. Earnings per Share is
used by Wall Street & other stock market
analysts to measure the profitability of a
company versus another company in the same
industry, plus is a way of evaluating quarterly
financial results of the company.
What is an Average Outstanding
• Average outstanding shares is also known as
the Weighted Average number of shares
because since a company's outstanding shares
on the stock market change all the time, we
like to use an average that represents a fair
number of shares throughout the year. Some
companies use the outstanding number of
shares at the end of one period in order to
simplify their calculations.
Calculate Earnings per Share
• Here's a hypothetical example. ZZZ Corp. has a net
income of $50 million for the year ended December
31st, 2010 and has 20 million shares outstanding on
the New York Stock Exchange (NYSE). The company
does not have any preferred shares outstanding so it
does not have to pay out any preferred dividends.
What is the Earnings per Share?
• EPS = (Net Income - Dividends on Preferred Stock) /
Average Outstanding Shares
• EPS = ($50 million - $0) / 20 million shares
• EPS = $2.50
Real Life Example - International Business
Machines Corp. (Public, NYSE:IBM)
• For its first quarter ended March 31st, 2010, IBM reported the
following numbers (derived from its annual report):
• - Revenue of $22.9 billion, up 5 percent,
• - Net income of $2.6 billion, up 13 percent
• - Pre-tax income of $3.5 billion, up 13 percent
• - The weighted-average number of diluted common shares
outstanding in the first-quarter 2010 was 1.32 billion compared
with 1.35 billion shares in the same period of 2009. As of March 31,
2010, there were 1.28 billion basic common shares outstanding.
• Using this data, let's calculate the Earnings per Share:
• EPS = Net Income / Average Outstanding Shares
• EPS = $2.6 billion / 1.28 billion
• EPS = 2.03
Analyst Estimates on EPS
• Most large cap organizations in the United States have several Wall
Street analysts that closely follow the company's earnings and
business operations in order to forecast an earnings per share
number. Analysts following a company like to issue EPS estimates
for the most recent quarter, the next quarter, the current fiscal
year and the next fiscal year. The average of all analysts' estimates
are tabulated and a final EPS estimate is released on the financial
media. Other information that comes along with EPS estimates is:
• i) Number of Analysts - This indicates the number of analysts that
have provided estimates for this company and are closely
monitoring the business.
• ii) High/Low Estimates - This provides estimates of the low end of
the EPS versus the high end; generally the closer these estimates
are together, the more confident you can be of the earnings
Real Life Example: Shaw Communications
(Public, NYSE:SJR) profits of $158 million top
analyst estimates
• CALGARY - Shaw Communications Inc. (Public, NYSE:SJR) reported
better-than-expected third- quarter results Wednesday thanks to a
growing base of digital, cable and Internet subscribers. The
Calgary-based cable company reported net income of $158 million
for the three-month period, compared to $132 million a year ago.
That's worth 37 cents per share, topping analyst expectations of
nearly 34 cents per share, according to a Thomson Reuters poll.
Revenue increased 10 per cent to $943.6 million. Shares in Shaw
rose 11 cents to $19.24 on the Toronto Stock Exchange around
midday Wednesday.
• Companies who do an earnings surprise, i.e. their earnings per
share is higher than analyst estimates are handsomely rewarded
on the stock market as investors rush to buy the stock.
Price Earnings Ratio
• Price of stock/ Earnings Per Share
Example One
• Company XYZ is currently selling for $40 per
share. The company declared a net income of
600,000 dollars with an average of 500,000
shares of stock outstanding.
• Calculate earnings per share:
– 600,000/ 500,000 = $1.2
• Calculate P/E Ratio:
– 40/1.2 = 33.33 (say it with me: this stock is selling
at 33 times its earnings per share)
Example Two
• Company TSO is currently selling for $30 per
share. The company has net income of
$800,000 with an average of 1,500,000 shares
of stock outstanding.
• Calculate the EPS:
– 800,000 / 1,500,000 = .53 cents
• Calculate the PE Ratio:
– 30 / .53 = 56.60 (say it with me: this stock is
selling at 56 times its earnings per share)
Handout : Stock market page
• Questions 1 -7 to be completed by student