Earnings per Share: Definition, How To Calculate, and Limitations

Earnings per share (EPS) is a financial term that calculates a company’s earnings per share. This figure informs investors about how much money a company earns for each share they own. In Singapore’s competitive market, EPS is critical in assessing firm performance and attracting investors. Accurate EPS reporting can boost investor trust and consequently affect stock prices.

This article defines earnings per share and how to calculate it using various formulae. It also discusses key issues such as basic versus diluted EPS, EPS excluding unusual items, and the relationship between EPS and dividends or capital. Understanding these aspects enables business owners and investors to make smarter financial decisions and accurately measure company health.

Key Takeaways

• Earnings per share (EPS) is a crucial financial metric that shows a company’s profit allocated to each outstanding share, helping investors assess profitability.
• EPS calculation involves formulas like the basic formula, net income formula, and continuing operations formula to reflect different aspects of company earnings.
• EPS has limitations such as being influenced by accounting practices, share buybacks, and capital structure changes; it also overlooks debt and cash flow health.
• ScaleOcean accounting software supports accurate financial management by integrating key accounting processes and providing real-time data for better decisions.

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What is Earnings per Share?

Earnings per share (EPS) is an important financial metric that indicates a company’s earnings per share of stock. It informs investors about how much the company makes each outstanding share of ordinary stock. Analysts and investors use EPS to assess a company’s financial health and contrast it with competitors. This statistic simplifies the examination of profitability per share.

EPS is a reliable predictor of a company’s capacity to make profits for its shareholders. It shows the percentage of profit allocated to each share owned by investors. Investors frequently use EPS because it provides a simple way to inform their investment decisions. Understanding EPS allows shareholders to better evaluate the value of their assets.

Also Read: 12 Best Financial ERP Software in Singapore 2025

How to Calculate Earnings per Share?

Companies calculate earnings per share using the financial data they report. They apply different formulas to calculate EPS based on the context and the type of profits they analyze. Profitability ratios for business, including EPS, are essential for evaluating a company’s ability to generate profit and assess its financial health. Below are the main formulas they usually use:

1. Basic Formula

The fundamental formula for calculating EPS is to divide the company’s net income minus preferred dividends by the weighted average number of shares outstanding. These figures are typically derived from the company’s general ledger, which records all financial transactions. This approach provides a concise overview of earnings attributable to ordinary shareholders. The following is the formula used:

2. Net Income Formula

This formula calculates the company’s net income after deducting taxes and preferred dividends. To calculate earnings per share (EPS) for the reporting period, divide net income by weighted average shares outstanding. It represents overall profitability after all expenses. The formula for this computation is as follows:

3. Continuing Operations Formula

This formula determines earnings per share (EPS) solely from ongoing business operations. It excludes earnings or losses from discontinued segments or extraordinary items, resulting in a more accurate depiction of routine business profitability. The formula is shown below:

What Does Earnings Per Share (EPS) Indicate?

To better understand how profits per share (EPS) works in practice, consider a formula example that breaks down the calculation. The basic earnings per share (EPS) formula is earnings accessible to common shareholders divided by the weighted average number of outstanding shares. According to MoneyShare Singapore, a company’s share price can be affected by market fluctuations and may decline if the company faces serious financial difficulties. This formula accounts for net income minus preferred dividends, which are paid before common stockholders.

For example, Assume a corporation has a net income of SGD 1,000,000 and has 500,000 common shares outstanding. If the corporation pays SGD 100,000 in preferred dividends, common shareholders will gain SGD 900,000. Dividing this by 500,000 shares yields an EPS of SGD 1.80 per share, indicating that each share earned SGD 1.80 during the reporting period.

Basic EPS vs. Diluted EPS

Basic EPS calculates earnings per share using only the current number of shares outstanding. It reflects profits given to existing stockholders without regard for possible changes. This formula is simple and understandable, displaying the company’s earnings based on actual shares.

Diluted EPS comprises not just existing shares, but also future shares derived from stock options, convertible bonds, or other securities. It takes a more cautious approach, displaying earnings if all potential shares were issued. This method enables investors to understand the worst-case impact on earnings per share.

EPS Excluding Extraordinary Items

Companies may face one-time gains or losses, referred to as extraordinary items. These occurrences are exceptional and not typical of normal corporate operations. Including them in earnings per share may mislead investors about genuine profitability. Analysts frequently omit these elements in order to focus on consistent business success.

EPS omitting unusual items is calculated only from routine operations. This method provides a more accurate picture of ongoing profitability. By removing these exceptional gains or losses, investors may properly assess the company’s long-term performance. It allows for more equitable comparisons between companies and time periods.

EPS From Continuing Operations

EPS from continuing operations solely considers earnings generated by a company’s primary and ongoing business activity. It excludes any profits or losses from business units that have been sold or closed down. This method provides a more accurate picture of how the company’s core operations are progressing over time. Investors use this metric to prevent being misled by unusual or one-time events.

By excluding ceased activities, this EPS computation more precisely reflects sustainable earnings. It allows investors to examine the underlying profitability of the current firm without distractions. This clarity facilitates comparisons across organizations and across reporting periods. As a result, EPS from continuing operations is widely seen as a more trustworthy predictor of business health.

EPS and Capital

Earnings per share are strongly related to a company’s capital structure and the total number of shares outstanding. Accurate inventory accounting plays a key role in determining net income, which directly impacts EPS calculations. When a corporation issues new stock, the overall number of shares increases. Because profit is distributed over a larger number of shares, earnings per share decrease. In contrast, share buybacks reduce the number of outstanding shares, which can boost EPS by concentrating earnings.

Investors closely follow these capital movements to determine their influence on EPS and company value. Changes in capital have a direct impact on how profitable each share appears. A rise in outstanding shares frequently reduces EPS, even if total profit remains constant. Meanwhile, buying back shares can suggest confidence while increasing EPS, luring investors. It is critical to consider these elements when calculating EPS since capital transfers might skew true profitability per share.

EPS and Dividends

Companies frequently transfer a portion of their earnings to shareholders as dividends, rewarding investors. A good EPS often supports sustained and possibly increasing dividend payments. Dividends appeal to income-oriented investors who seek consistent cash flow from their investments. Some organizations, particularly those focused on growth, may choose to reinvest earnings rather than pay dividends. Rather than providing immediate rewards, these companies attempt to increase future earnings.

Even if their earnings per share are high, not all corporations prioritize dividends. Earnings are reinvested to drive growth, research, and debt reduction. Investors should weigh their desire for dividends against the company’s growth prospects. Understanding how EPS relates to dividends allows investors to select stocks that match their income or growth goals.

EPS and Price-to-Earnings (P/E)

Earnings per share (EPS) is essential when calculating the price-to-earnings (P/E) ratio, a key stock valuation tool. The P/E ratio compares a company’s current share price to its earnings per share, helping investors evaluate stock worth.

This ratio enables investors to determine whether a stock is priced fairly relative to its profits. A higher P/E ratio might suggest the stock is overvalued, while a lower P/E could indicate it is undervalued or has strong growth potential.

What Is Rolling EPS?

Rolling EPS is a way of measuring earnings per share over time, often the last four quarters. This strategy reduces short-term swings and provides a more current picture of a company’s profitability. The following are crucial comparisons to better understand rolling EPS:

1. Rolling EPS vs. Trailing EPS

Trailing EPS determines earnings per share based on total income over the past 12 months. It provides a snapshot of a company’s performance over the previous full year, which is valuable for determining current yearly profitability.

Rolling EPS differs in that the earnings calculation is updated every quarter to reflect the most recent data. This continual updating ensures that rolling EPS reflects current earnings patterns more quickly, decreasing the delay seen in trailing EPS.

2. Rolling EPS vs. EPS Growth Rate

EPS growth rate estimates the percentage change in earnings per share over a given time period, indicating how quickly a company’s profitability improves or declines. It enables investors to select companies with substantial earnings growth.

Rolling EPS, on the other hand, presents the actual earnings figure averaged over a moving time, with an emphasis on current profitability levels rather than growth rate. Together, these measurements provide complimentary information on a company’s financial health.

What is a Good Earnings Per Share Ratio?

A healthy earnings per share ratio varies according to the industry and market conditions. Certain industries naturally have greater or lower EPS averages. Generally, a greater EPS indicates that a company is more profitable and efficient. Investors frequently prefer companies with high EPS since they indicate higher returns on their investments. According to ACRA Singapore, companies often buy back shares when they have excess capital, which boosts EPS and improves financial ratios like return on equity.

Aside from the current EPS value, investors are interested in how EPS changes over time. Consistent growth in EPS indicates that the company’s earnings are steadily increasing. This consistent growth demonstrates sound management and a long-term business model. As a result, companies with rising EPS trends are often regarded as healthier and more appealing to investors.

What Is the Difference Between Basic EPS and Diluted EPS?

The primary distinction between basic and diluted EPS is in the number of shares considered. Basic earnings per share (EPS) are calculated using only the currently issued shares. It excludes any shares that could be produced through convertible securities or stock options. This means that basic EPS reflects earnings per share based on the existing share count. Investors frequently use basic EPS to determine current profitability per share without regard for possible dilution.

However, diluted EPS includes all possible future shares. These include shares of stock options, convertible bonds, and other securities. By accounting for these possible shares, diluted EPS provides a more conservative estimate of earnings per share. This estimate assumes that all convertible instruments are exercised, which increases the share count. As a result, diluted EPS helps investors understand the worst-case profits impact of dilution.

What Is the Difference Between EPS and Adjusted EPS?

Earnings per share (EPS) is calculated using net income recorded in a company’s financial statements. This net income reflects all revenues and expenses, including one-time or exceptional items. As a result, earnings per share (EPS) reflect the company’s overall profit for a given reporting period.

Adjusted EPS, on the other hand, does not include unique factors like extraordinary gains, restructuring expenditures, or one-time expenses. This adjustment provides a more accurate picture of the company’s ongoing and sustainable earnings. As a result, adjusted EPS allows investors to focus on the company’s long-term profitability.

What Are Some Limitations of EPS?

Despite its utility, EPS has some significant limits that investors should analyze carefully. Accounting practices can influence EPS numbers, complicating comparisons between organizations. Share buybacks reduce the number of outstanding shares, falsely increasing EPS without improving actual profitability. Changes in a company’s capital structure, such as the issuance of new shares, have an impact on EPS and can distort the underlying earnings picture.

Furthermore, EPS does not take into account a company’s debt levels or cash flow health, both of which are important indicators of financial soundness. Because EPS focuses solely on reported earnings, it may overlook underlying difficulties in business operations. Relying entirely on EPS may cause investors to ignore significant financial dangers or possibilities. For a more comprehensive examination, EPS should be used in conjunction with other financial measures.

How Do You Calculate EPS Using Excel?

Calculating earnings per share in Excel is a simple approach to rapidly assess a company’s profitability per share. While Excel is widely used, modern cloud accounting solutions can automate this process by integrating net income, preferred dividends, and the weighted average number of outstanding shares seamlessly. To make this computation, use the formula:

Assume the net income figure is placed into cell B2, preferred dividends are recorded in cell B3, and the weighted average number of shares outstanding is indicated in cell B4. To keep your data structured, enter these financial numbers straight into the appropriate fields in Excel. The formula for calculating earnings per share using these inputs is as follows:

Using Excel to calculate EPS provides significant flexibility and speed in financial research. It allows you to easily alter values and immediately view the impact on EPS. This strategy avoids manual errors and allows for quick comparisons of numerous scenarios, making it a useful tool for investors and analysts.

Manage Your Finances More Accurately with ScaleOcean Accounting Software

ScaleOcean is a complete accounting software that aims to help organizations manage their finances more accurately and efficiently. This sophisticated application connects many financial processes, providing advantages such as simplified bookkeeping, real-time financial information, and better decision-making. ScaleOcean automates common accounting operations and connects them to other company functions, allowing businesses to save time, eliminate errors, and gain better financial management.

To make it easier for organizations to reap these benefits, ScaleOcean provides a free demo that lets prospective users explore its capabilities firsthand. Additionally, firms can use the CTC grant to promote software adoption and digital transformation projects. The following is a list of main features from ScaleOcean software:

• Integrated End-to-End Accounting Module, ScaleOcean provides a fully integrated accounting module connected with other modules like sales, purchasing, inventory, and assets.
• Bank Integration with Automatic Reconciliation and Payment, Direct bank integration features allow automatic matching of bank transactions with internal records and automate scheduled payments.
• Multi-Level Financial Analytics and Reporting, ScaleOcean offers customizable financial reports and deep analytics, including comparisons across projects, branches, or departments.
• Compliance with Local Financial Standards and Regulations, The accounting module is tailored to comply with local financial reporting standards (such as PSAK DJP) and government regulations.
• Budgeting and Profit & Loss vs. Forecast Comparison, Features that compare actual profit and loss reports against budgets and forecasts help companies control finances and analyze variances accurately.

Also Read: Accounting System: Definition, Features, and Types

Conclusion

Making educated judgments and maintaining healthy cash flow require accurate financial management within an organization. A comprehensive accounting solution integrates all essential financial operations, leading to improved control, compliance, and insightful reporting. Businesses can save time, reduce errors, and gain a clearer understanding of their financial performance through streamlined accounting processes and powerful features.

ScaleOcean’s accounting software provides strong features geared for current organizations, making it an efficient and dependable approach to handle their accounting demands. It’s easy interaction with other corporate processes and conformance to local standards make it an excellent alternative for improving financial management. ScaleOcean allows businesses to simplify their workflows and focus more on strategic growth.