How do I calculate earnings per share (EPS)?

Earnings per share (EPS) is one of the most talked-about financial metrics. It's a key figure in every earnings report, yet many people don't fully understand what it is or how it’s calculated. In this episode, we're decoding EPS to help you make smarter financial decisions.

We break down the EPS formula, explaining what goes into it, including net income, preferred dividends, and weighted average shares. We'll also tackle the crucial difference between basic EPS and diluted EPS, revealing why diluted EPS is often the more important number to watch.

More than just the math, we’ll explore how different investors and traders—from long-term investors to short-term options traders—use EPS, and we'll expose the common traps and potential deceptions behind this widely-cited number.

Tune in to learn how to calculate EPS yourself and gain a deeper understanding of what a company's earnings really mean for you. Don't forget to subscribe for more insights on conservative options trading.

Key Takeaways

• EPS is a measure of profitability per share. It normalizes a company's profit, making it easy to compare the efficiency of companies of different sizes.
• The basic EPS formula is simple: (Net Income−Preferred Dividends)/Weighted Average Shares Outstanding.
• Diluted EPS provides a more conservative view. It factors in all "potential" shares from things like employee stock options and convertible bonds, which would dilute EPS if they were exercised.
• Context is everything. A higher EPS number isn't always better. You must consider growth rates, industry standards, and other metrics like the P/E ratio, revenue growth, and cash flow.
• EPS can be misleading on its own. Companies can manipulate EPS with one-time gains or share buybacks. It's essential to look at EPS alongside a company's cash flow statement to get a full picture.

"You'll have a much better idea whether your natural inclination is maybe to play the lottery ticket or run the insurance company."

Timestamped Summary

• 0:45 What earnings per share (EPS) is at its most basic level.
• 1:54 The formula for calculating basic EPS.
• 3:33 The important difference between basic and diluted EPS.
• 5:30 Where to find the numbers you need to calculate EPS.
• 9:40 Why EPS can be misleading on its own.
• 11:56 How different types of investors use EPS.

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