Different Methods of Computing Earnings per Share

Earnings per share is a common multiplier that is used in order to value a company. Investors will use this method in order to determine how much they should be paying for a share of stock. Even though this method is common, there are several different ways that you can calculate it. Here are a few of the different methods of computing earnings per share.

P/E Ratio

The most basic form of the earnings per share calculation is the price over earnings ratio. This is a simple calculation but it is also one of the most effective. In order to calculate this value, you are simply going to take the price per share of stock and divide that by the annual earnings per share. For example, if you had a stock that was trading at $24 per share and the earnings per share for the year was $6, you would take $24 divided by $6. This gives you a price over earnings ratio of 4. 

Trailing P/E

One variation on this concept is the trailing price over earnings ratio. With this method, you are going to look at the most recent 12 month period when doing your evaluation. In order to calculate the denominator in this equation, you will take the net income and divide that amount by the number of outstanding shares in the market place. For example if the net income of a company was $100,000,000 and there were 1,000,000 shares outstanding, the earnings per share would be $100. You would then take the market price and divide it by $100 to get the trailing price over earnings ratio.

Trailing P/E From Continued Operations

This calculation is very similar to the trailing price over earnings ratio calculation. The only difference is that instead of using net income to calculate the earnings per share, they use operating earnings. This figure is very similar except that it subtracts out income from accounting changes, or one time projects. You would take the operating earnings and divide that amount by the outstanding shares.

Forward P/E

The forward price over earnings ratio works a little bit differently because you are making calculations based on assumptions on how much a company is going to earn in the future. This method attempts to predict what is going to happen, so it can be a little unreliable. With the forward price over earnings ratio, you are going to take the projected net income for the next 12 months and divide that number by the amount of shares that are outstanding in the market place.

In order to get the projected net income, you can turn to a stock analyst. Most of the time, you will want to look at several different projections and average them out to come up with a median value. You can then take the market price for a share of the stock and divide it by this number in order to come up with the forward price over earnings ratio. 

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