Earnings Per Share or EPS is a key data point. EPS is calculated by dividing Net Earnings by the number of Shares outstanding. EPS can be calculated on a Fully Diluted basis or adjusted for Normal Earnings.
EPS is one of, if not the most important earnings parameters to cover in Stock Valuation. The EPS is calculated by taking the Net Earnings (Net Income) figure and then dividing by the number of shares outstanding, usually the weighted average shares outstanding over the period. A Fully Diluted EPS figure takes into consideration all the potential shares that could be outstanding. The adjustment includes all the potential shares that could be issued under the various derivative contracts, stocks options, convertible securities and warrants if they were exercised.
Another important EPS figure is, adjusted EPS, which excludes all non-core profits and losses and minority interests. The objective in making this adjustment is to include only the profit or loss generated from core operations on a normalized basis. Keep in mind the EPS figure is a unique figure for a company. The EPS is one of the two parameters of the PE Ratio. Calculated by the formular:
PE Ratio = Share Price / EPS
Once the PE Ratio has been calculated a comparative valuation can be made either against the Company’s historical PE, versus its Sector or versus the Index.
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