Earnings per share, also known as EPS, is the portion of a company’s income that will be allocated to each outstanding common share. This is an important metric that helps determine the profitability of a company. Many investors look at the EPS before they put money on certain stocks. However, it is worth noting that there are many types of EPSs that companies report or disclose. An investor must have a good understanding of the various types of earnings per share in order for him or her to make informed investment decisions.
1. GAAP EPS
Popularly known as the reported EPS, this type of earnings per share is based on the Generally Accepted Accounting Principles (GAAP). This is a required item on the financial statements that are submitted to the Securities and Exchange Commission. Yet even if companies are compelled to abide by GAAP provisions, there are instances when some businesses are able to circumvent certain GAAP rules and make their reported EPS more attractive to investors. Therefore, investors should also read and study the footnotes to a company's financial statements. This is the only way that investors can gain understanding of how the GAAP EPS has been derived.
2. Pro Forma EPS
"Pro forma" is a Latin phrase that is literally translated as “as a matter of form.” Whenever you encounter a pro forma EPS, it only means that the company has made assumptions about certain accounting items, especially with regard to expenses, incomes or acquisitions, to come up with pro forma earnings per share. This type of EPS is typically used by companies to help improve their financial statements.
3. Ongoing EPS
This type of EPS is derived from ongoing or normalized net income, which excludes unusual items or one-time events. A one-time gain from a sale of a property, for example, is excluded because such a transaction is not part of the core operations of the company. This type of EPS is important to companies because they use it as basis for future EPSs.
4. Headline Earnings per Share
A headline EPS, as the name implies, is the earnings per share that a company reports to the media or press. You can see this data being flashed on business television channels. The headline EPS can be the pro forma EPS or the one that analysts have computed based on the company’s released financial statements. However, investors should not rely too much on this figure because the information on how this EPS has been computed is not usually available.
5. Cash EPS
A cash EPS is derived by dividing the operating cash flow by the number of outstanding diluted shares. This type of earnings per share can offer investors a better picture of the financial status of the company because it is not really easy to manipulate the operating cash flow figure. You can also determine the liquidity of a company by using this EPS, as it factors in cash earned as well as changes in important asset accounts, such as inventories and receivables.