How do I calculate Earnings Per Share? And once I have calculated EPS, how do I analyze EPS? What are the drivers of the Earnings Per Share performance of a company?

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00:00 Introduction
00:13 EPS formula
01:04 Earnings Per Share example
01:49 Diluted EPS
02:43 EPS analysis
04:00 EPS and sharecount
05:31 EPS income statement

As the term Earnings Per Share suggests, the formula to calculate EPS is fairly simple: take Net Income (or more officially-sounding the “consolidated net income attributable to the company”), and divide it by the number of shares (or more officially-sounding the “weighted-average number of common shares outstanding”). You take the absolute number of Net Income, which can be positive or negative, and which can be large or small, and make it “relative” by dividing it by the number of shares. How much Net Income belongs to each share? If you visualize this in a pie chart: what’s my share of the total Net Income, versus that of other shareholders? 1/10th? 1/100th? Or 1 billionth? That obviously depends on the number of shares outstanding.
Let’s take a real life example of calculating Earnings Per Share for Apple Inc, second quarter of fiscal year 2020. The press release states that quarterly earnings per diluted share were $2.55, an increase of 4% versus the EPS of the prior year. We will replicate the calculation to verify the $2.55 EPS, and we will analyze what drove the increase in EPS of 4% versus prior year. To do this, we turn to the 10-Q filing of quarterly financial results. Item 1 Financial Statements, more specifically the consolidated statement of operations, also called the income statement.
Here in the middle is the $2.55 diluted EPS for the quarter, which is the outcome of the EPS calculation. The inputs are Net Income in the numerator, and the number of shares in the denominator. By the way, the diluted number of shares means “as if all convertible securities were exercised”. The basic number of shares is the number that currently exists, the diluted number of shares below it is the number that could exist if all convertible securities were exercised at the earliest point in time: things like stock options, convertible debt, and warrants. Let’s get the calculator out. $11.2 billion in Net Income for the quarter, divided by 4.4 billion shares, results in Earnings Per Share of $2.55.
What about the 4% increase in EPS? Well that increase of 4% is actually the result of a decrease in Net Income year-over-year of 3% versus a 6% year-over-year decrease in the number of shares. The Net Income decreased, but the number of shares decreased faster! Mathematically speaking, a decrease in the denominator that is bigger than the decrease in the numerator, causes the result of the calculation (in our case EPS) to increase. How does the number of shares decrease so dramatically? In recent years, Apple has spent between $60 billion and $80 billion of cash per year to buy back shares, equal to or greater than the Free Cash Flow they generate each year!
An interesting calculation to perform is to figure out what the Earnings Per Share would have been if the number of shares had remained constant. Out comes the calculator again. $11.2 billion in Net Income, divided by 4.7 billion shares, would have been $2.39. That would have been a decrease in EPS of 3%, in line with the Net Income decrease of 3%.
We looked at the change in the number of shares already, let’s now look at the decrease in Net Income. What is driving that? That’s where analyzing EPS turns into understanding and analyzing the income statement! How did $11.6 billion Net Income last year turn into $11.2 billion Net Income this year?
Hope you enjoyed this discussion of how to calculate and analyze EPS. I encourage you to replicate the analysis for companies that you are interested in! Let me know the outcome in the comments below!