Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
 Ratio Analysis
 Liquidity Ratios
 Turnover Ratios
 Profitability Ratios
 Profit Margin
 Gross Profit Margin Formula
 Operating Profit Margin Formula
 Net Profit Margin Formula
 EBIDTA Margin
 Earnings Per Share
 Basic EPS
 Diluted EPS
 Basic EPS vs Diluted EPS
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)
 Return on Invested Capital (ROIC)
 Return on Total Assets (ROA)
 Return on Average Capital Employed
 Capital employed Employed
 Return on Average Assets (ROAA)
 Return on Average Equity (ROAE)
 Return on Assets Formula
 Return on Equity Formula
 DuPont Formula
 Net Interest Margin Formula
 Earnings Per Share Formula
 Diluted EPS Formula
 Contribution Margin Formula
 Revenue Per Employee Ratio
 Operating Leverage
 EBIT vs EBITDA
 EBITDAR
 Capital Gains Yield
 Tax Equivalent Yield
 LTM Revenue
 Operating Expense Ratio Formula
 Overhead Ratio Formula
 Capacity Utilization Rate Formula
 Total Expense Ratio Formula
 Efficiency Ratios
 Dividend Ratios
 Debt Ratios
 Debt to Equity Ratio
 Debt Coverage Ratio
 Debt Ratio
 Debt to Income Ratio Formula (DTI)
 Capital Gearing Ratio
 Capitalization Ratio
 Interest Coverage Ratio
 Times Interest Earned Ratio
 Debt Service Coverage Ratio (DSCR)
 Financial Leverage Ratio
 Net Debt Formula
 Leverage Ratios
 Operating Leverage vs Financial Leverage
 Current Yield
 Debt Yield Ratio
We note that there are two variations of EPS calculation – Basic EPS and Diluted EPS in Colgate. Also, note that stock options and restricted stock units are affecting the total number of shares outstanding. If this is slightly confusing at this stage, then worry not, the primer on EPS cover the basics and then take you to the advanced level of Earnings Per Share. Topics covered are as per below –
 What is Earnings Per Share
 Simple vs Complex Capital Structure
 Basic Earnings Per Share or Basic EPS Definition
 Calculating Weighted Average Number of Shares
 Stock Dividends & Stock Splits
 How Earnings Per Share is related to Stock Markets?
What is Earnings Per Share or EPS?
Most commonly used corporate profitability measure for publicly traded firms. Earnings per share (EPS) tells common shareholders how much of the available income is associated with the shares they own (their share of the pie).
Important points to note about EPS

 EPS is only reported for shares of common stock
 Non publicly traded firms are not required to disclose EPS calculations
 EPS provides insight to common shareholders about:
 Future dividend payout
 The value of their shareholdings
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Simple vs Complex Capital Structure
A company’s capital structure is simple if it consists of only common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share. Companies with simple capital structures only need to report basic EPS formula.
A complex capital structure has securities that could have a dilutive effect on earnings per common share. As of now, think of dilutive effect as those securities that lower the Earnings Per Share.

 Complex capital structure has potentially dilutive securities like convertible securities, Options or warrants.
 Companies with complex capital structures must report both basic EPS and diluted EPS calculations.
 Diluted EPS calculation under a complex capital structure allows the investors to see the adverse impact on EPS if all diluted securities convert into common stock.
Let us look at the Colgate example again in this context. Colgate has a complex capital structure – Why? Reason is that their capital structure contains stock options and restrictive stock units that may increase the number of shares outstanding (denominator). If the number of shares outstanding increases, then the EPS will decrease. Please note in case of Colgate, the number of shares that increase due to stock options and restricted stock units is 9.1 million for the year of 2014.
source – Colgate 10K filings
Basic Earnings Per Share (EPS) Definition
Basic EPS calculation does not consider the effect of any dilutive securities. Here we use the actual earnings and actual number of issued common shares issued
Basic EPS Formula in a simple capital structure:
The current year’s preferred dividends is subtracted from net income because EPS refers to earnings available to the common shareholder. Common stock dividends are not subtracted from net income.
Let us take the example of Colgate from above example, the Net Income (2013) attributable to Common Shareholders is $2,241 million and common shares outstanding is 930.8 million. EPS calculation of Colgate for 2014 is $2,241 / 930.8 = $2.41
source – Colgate 10K filings
Since the number of common shares outstanding may change over the year, the weighted average is used to calculate EPS. The weighted average number of common shares is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Analysts need to find the equivalent number of whole shares outstanding for the year.
Three steps to calculate the weighted average number of common shares outstanding:
 Identify the beginning balance of common shares and changes in the common shares during the year.
 For each change in the common shares:
 Step 1 – Compute the number of shares outstanding after each change in the common shares. Issuance of new shares increases the number of shares outstanding. Repurchase of shares reduces the number of shares outstanding.
 Step 2 – Weight the shares outstanding by the portion of the year between this change and next change: weight = days outstanding / 365 = months outstanding / 12
 Step 3 – Sum up to compute the weighted average number of common shares outstanding.
Calculate Basic EPS
Albatross Inc 2007 Net Income – $1,000,000. Additional data provided below

 100,000 Class A shares preferred cumulative shares, dividend amount $2.00/share
 50,000 Class B shares preferred non cumulative shares, dividend amount $1.50/share
 No Dividend declared or paid in the current year
 What will be the numerator of basic EPS for Albatross Inc?
Numerator of EPS = Net Income – Preferred Dividends
Weighted average number of shares calculation
Weighted average number of shares are calculated as per below –
Effect of Stock Dividends & Stock Splits on Earnings Per Share
 In computing weighted average number of shares, stock dividends and stock splits are only changes in the units of measurement, not changes in the ownership of earnings. A stock dividend or split shareholders).
 When a stock dividend or split occurs, computation of the weighted average number of shares requires restatement of the shares outstanding before the stock dividend or split. It is not weighted by the portion of the year after the stock dividend or split occurred.
 Specifically, before starting the three steps of computing the weighted average, the following numbers is restated to reflect the effects of the stock dividend/split:
 The beginning balance of shares outstanding;
 All share issuance or purchase prior to the stock dividend or split;
 No restatement is made for shares issued or purchased after the date of the stock dividend or split.
 If a stock dividend or split occurs after the end of the year, but before the financial statements are issued, the weighted average number of shares outstanding for the year (and any other years presented in comparative form) must be restated.
Calculate the effect of Stock Splits & Stock Dividends on EPS calculations
Calculate the weighted average number of shares for the following –
Weighted average number of shares are calculated as per below –
Colgate’s Stock Dividends –
As a result of the 2013 Stock Split all historical per share data and numbers of shares outstanding were retroactively adjusted. In 2012, the shares outstanding were 476.1 million and they almost doubled up to 930.8 million due to twoforone stock split.
source – Colgate 10K filings
How Earnings per Share is related to the Stock Markets
Earning represents profitability of the company and is considered to be the most important indicator of financial health of the company. Earnings are reported four times a year by the publicly listed companies and we note that research analysts and investors closely follow this earnings season. Growing earnings or EPS is a measure of company’s great performance and in a way a measure of returns for the investor. Infact, EPS is directly to the stock markets by way wide tracked wallstreet PE Muliple or Price/EPS ratio. Lower the PE multiple compared to the Industry average PE, better it is from the point of view of investments and valuations. Stock prices react sharply to quarterly earnings due to the very same connection. For example, below is the share price movement of Blackberry Ltd after quarterly earnings report. Note the sharp movements in the stock prices. Learn more about Enterprise Value and Equity Value here
Other Resources that you may like
This has been a guide to What is Earnings Per Share. Here we learn how to calculate basic eps with weighted average shares, share splits and stock dividends along with practical examples. You may also learn more from the following articles on Shares
 Example of Stock Dividend
 Weighted Average Shares Outstanding Calculation
 Equity Value Calculation
 Diluted EPS Calculation
 Basic EPS Formula
 Diluted EPS Formula
 Book Value per Share Formula
 Dividends per Share Formula
What Next?
If you learned something new or enjoyed the post, please leave a comment below. Let me know what you think. Many thanks and take care. Happy Learning!
Shalin says
Hi,
Firstly, I appreciate the blog you have created. This is one of the tremendous work you have done. I have a little bit query with regards to ‘Calculate the effect of Stock Splits & Stock Dividends’where your answer is 185000 as weighted average common share outstanding, and my answer is 162500. Can you please recalculate the Stock Splits & Stock Dividends on weighted average comm. share outstanding….?
Thanks & Regards,
Shalin
Dheeraj Vaidya says
Hi Shalin,
thanks for the question. I guess you missed the restatement that needs to be done due to 50% stock dividend. The calculation becomes (100,000 x 1.5 x 3/12) + (120,000 x 1.5 x 2/12) + ……
Best,
Dheeraj
alex Wang says
Thanks so much for a clear picture for the EPS evolution.
Alex
Dheeraj Vaidya says
Thanks Alex. 🙂
wilson says
thank you so much, it is so helpful to me
Dheeraj Vaidya says
thanks Wilson!
jenni says
dalam menghitung %perubahan eps, eps mana yang digunakan??
eps dilusian atau eps dasar??
Joan says
I am preparing for a certification exam and your article provided much know leg area beyond what I needed. Thank you.
Dheeraj says
Thanks Joan. I am glad you linked the article.
Regard,s
Dheeraj
mahendra edunoori says
its very interesting and helpful to me. i learned something extra what i knew earlier.
thanking you to share such files.
i hope i can learn many more new things by following you…
Sonal says
Thanks for sch a good and informative post. You mentioned EPS is helpful for investors, analyst. But wont ROE give a better picture of companys performance ?
Binodgopal Mukherjee says
Helpful. Simple. Easy to understand. Thanks for sharing your knowledge.
Regards
Binod
Dennis says
Hi Dheeraj,
Thank you for this elaborate article on EPS. Your style of writing is simple, yet comprehensive.
Dennis
Wall Street Mojo says
Thank you Dennis.
Suman says
Dear Dheeraj,
You articles relating to valuations are very helpful and easy to go thru. And very excellent stuff to learn and horn our valuation skills.
Regards,
Suman Kumar.K
Wall Street Mojo says
Many thanks. I am glad you like these resources 🙂