How to Calculate EPS Using Return on Equity

by Bryan Keythman ; Updated July 27, 2017
Earnings per share shows net income per share of common stock.

A company’s earnings per share, or EPS, is the amount of net income the company generates for each share outstanding of common stock. Stockholders watch this number closely, as it is a key indicator of a company’s performance. Return on equity equals a company’s net income divided by its stockholders’ equity, and measures how much net income the company generates for every dollar of stockholders’ equity it has. If you know a company’s return on equity, you can calculate EPS using information from its balance sheet to determine its profit performance.

Step 1

Visit the stock quote section of any financial website that provides stock quotes, and find the company’s return on equity, which is a common financial metric available for all public companies. For example, assume a company’s return on equity is 0.2.

Step 2

Find the "Stockholders' Equity" section on the company’s most recent annual balance sheet. You can find a company’s annual balance sheet in its 10-K annual report, which you can obtain for free from the U.S. Securities and Exchange Commission’s EDGAR online database.

Step 3

Identify the number of outstanding shares of common stock, listed in the "Common Stock" line item’s description, and the amount of total stockholders' equity, listed on the last line of the section. In this example, assume the company has 16,000 outstanding shares and $100,000 in total stockholders' equity.

Step 4

Multiply the company's return on equity by its total stockholders' equity to calculate the amount of its net income. In this example, multiply 0.2 by $100,000 to get $20,000 in net income.

Step 5

Divide the company’s net income by the number of outstanding shares to calculate its EPS. In this example, divide $20,000 by 16,000 to get $1.25 in EPS.

Tips

  • Compare a company's EPS over different years to track its changes. A consistently rising EPS suggests the company is growing its profits, which could lead to a higher stock price.

    Compare the EPS between companies in an industry. The company with a higher EPS generates profits more efficiently for stockholders.

References

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