What is Earning Per Share in E-Commerce

You need to have a strong e-commerce business if you want to attract investors and scale the way you want to.

But how do you know whether your online store can compete with all the other American stores in the same industry? How can you calculate your worth?

That’s where the EPS, or earnings per share, comes in.

This handy financial metric will let you determine how you’re performing. If you want to look great to investors, evaluate business performance, or make informed decisions about the future, this is one of the easiest metrics to turn to.

Learn how an EPS will help you, starting by learning what it is.

What is Earning Per Share 

The EPS ratio metric shows how much profit your business makes for every share of your stock. 

It’s calculated through the EPS formula:

EPS =  Net Income – Preferred Dividends / Average Outstanding Shares

This EPS equation has three things: the company’s net income, preferred dividends, and outstanding stock shares. 

Here’s a rundown of what they are, and where to find them:

• Net Income: This is your total net earnings after all expenses, taxes, and interest have been subtracted from total revenue. It shows the actual earnings available to shareholders. You’ll find this in your comprehensive income statement.
  
• Preferred Stock Dividends: These are dividends one company pays to preferred shareholders. This is because EPS only calculates the company’s earnings available to common shareholders, so you subtract it beforehand. You’ll typically see this on your financial statements at the end of the fiscal year or on attached notes.
  
• Average Outstanding Shares: This is the average number of shares available during the calculated period. You calculate the average because it should account for changes in share count at the time (for example, due to buybacks or new issuances.) There are several locations where you’ll find this information: the equity section of your company’s balance sheet, notes in your financial statements, shareholder reports, or stock exchange filings.

Understanding EPS isn’t just a fun pastime for e-commerce business owners. The figure can present real and impactful insights for your company, or be used for making investment decisions. The next section will discuss further.

Importance of EPS in E-Commerce

Understanding what EPS is and how to calculate it helps discover anticipated income and how your company is generating profit. 

Here are the main reasons why an e-commerce business can use this information:

• Investment insight: The company’s EPS serves as a key metric for investors. A higher EPS often positions you as the most suitable investment option because it suggests your business is profitable and has strong growth potential.
  
• Strategic planning: An ongoing EPS insight helps you determine whether you have the financial leverage to expand or need to streamline operations. You make informed decisions based on how much profit you generate per share.
  
• Benchmarking performance: By comparing your actual EPS with competitors, you can gauge where your business stands in the industry. This lets you see what strengths to build upon or areas that need improvement

You might still be in a stage of establishing your place in the market, in which case you need to know where you stand and plan for the future. Or, you might be aggressively pursuing investors to expand your e-commerce operations.

Without evaluating EPS you can struggle to define your business’ profitability. Not knowing will have ripple effects on future planning, investor acquisition, and business strategy, so it’s best to understand and utilize this metric.

Calculation of Basic EPS

Here’s a straightforward, step-by-step process to calculate the Earnings Per Share (EPS) of your e-commerce business:

1. Gather Financial Information. Start by collecting your company’s latest financial statements. You’ll specifically need the company’s income statement and any notes about shares from the balance sheet.
   
2. Calculate Earnings (Net Income). From the income statement, find the ordinary net income, A.K.A. bottom line earnings. This is your company’s real earnings in total after all expenses, including taxes and operational costs, have been deducted. It encompasses your core business ventures, excluding outstanding income like property or IP sales.
   
3. Deduct Preferred Dividends. If you issue any preferred shares, subtract preferred dividends (total dividend paid) from the net income. This is crucial as EPS only accounts for earnings available to common stock holders.
   
4. Determine the Average Number of Common Shares Outstanding. Look at the beginning and end of the period you want to calculate. Add these two numbers together, then divide by two to get the average number of shares for the period.
   
5. Calculate EPS. Finally, divide the adjusted earnings or net income (after deducting preferred dividends) by the average number of common shares outstanding. This is how you calculate earnings per share.

The higher the EPS value, the more profitable your company was in those periods, as more profits were available to your shareholders. On the other hand, low EPS can be an indication of bad financial health – though not always.

Also, there are several calculations of EPS, such as adjusting for non-recurring items, excluding discontinued operations (continuing operations only), excluding extraordinary items and any unusual expense, and calculating diluted EPS.

Diluted EPS and Its Relevance

It’s important to note that this metric can be split into a basic and diluted basis. 

Diluted EPS is a variation of the EPS metric, and it gives you further insights into your company’s performance. This metric is calculated using the same earnings per share formula:

EPS = Net Income – Preferred Dividends / Diluted Weighted Average Outstanding Shares

The main difference is that it shows you what would happen if the weighted average number you can issue, will be issued — expressed by the diluted shares outstanding. The “weighted average shares” for the period being measured will be significantly higher since it doesn’t just calculate existing company’s shares but also theoretical shares. Weighted earnings is still a great metric to have, although it might differ significantly from others.

These theoretical shares include convertible securities like:

• Restricted stock units and warrants;
• Convertible bonds;
• Any other financial instruments.

The diluted earnings per share gives you a conservative view of your fully diluted EPS if all possible shares were issued, showing the impact of issuing new shares on your basic earnings. So two companies might have the same EPS, but have completely different levels of performance. Understanding this gives you a good idea of the worst-case scenario of your business and tells investors what to expect realistically.

This can help in strategic business planning, benchmarking, and implementing anti-dilution provisions to prevent the worst-case scenario from happening.

How To Interpret EPS Trends

When you see a rising trend in EPS, it generally indicates that your business is growing its net profits.

This could be due to increased sales, better cost management, or both. It suggests that your business strategies are working well, possibly leading to the company’s share price increasing. This upward trend is a positive sign to investors and can increase the corporate value of your company in their eyes.

On the other hand, a declining EPS trend can be a warning sign that your business is facing challenges. This might mean declining sales, rising costs, or inefficiencies that need your immediate attention.

Consistently declining EPS might discourage investors and lower the valuation of your company.

Paying attention to trends in your EPS measure helps you understand the path your business is taking over time. A single EPS metric is just a snapshot of performance for a set period, and while that reveals a lot of things, it doesn’t show how you’re doing in the long term.

Periodically taking EPS over a certain period reveals much more than just a snapshot, offering insights into how effective your business strategies are. High retained EPS means that you’re doing something right!

EPS and Shareholder Value

Good EPS shows that your company is generating substantial profit relative to the total number of shares outstanding. 

This high EPS makes your company‘s stock more attractive to investors for several reasons:

• Suggests that you are profitable: A high EPS suggests that your business is profitable. This perception of the company’s financial health tends to boost investor confidence in its future prospects.
  
• Basis for positive stock valuations: Investors often use EPS as a key metric to value stocks. A rising EPS can lead to a higher stock’s price as it indicates that the company’s financial standing is good. Conversely, a falling EPS might lower the company’s stock price as it could signal declining performance.
  
• Expectation of healthy dividends: Shareholders often expect dividends from profitable and/or promising companies. A robust EPS can increase the dividend payout ratio, which directly benefits shareholders and can attract more investors as it appears to be a reliable investment option.

By improving or maintaining a strong EPS, you enhance its attractiveness to current and potential shareholders, potentially increasing the stock market value of your shares.

Regulatory Reporting Requirements for EPS

Publicly traded companies in the US have specific reporting requirements for EPS. 

The Generally Accepted Accounting Principles in the US state that you should include EPS figures when preparing your financial statements. Usually, you’ll need to stick to the GAAP EPS format.

Additionally, there’s a regulation from the Securities and Exchange Commission (SEC).

This rule requires companies to report any changes in share ownership, particularly:

• If someone owns shares with at least 5% of voting rights, or if they are a controlling shareholder, they must report any ownership changes. (This number varies depending on the jurisdiction)
  
• This report needs to be submitted quickly – no later than five business days after the ownership change.
  
• The report should detail the type of transaction, the classification of shares, and information about the people involved

The SEC regulation ensures transparency by aligning with international standards for reporting changes in listed companies’ ownership. Through this, everyone knows who owns significant parts of listed companies and any changes to that ownership.

Factors That Could Affect Earning Per Share

If you truly want to understand the profitability of your e-commerce business in the United States, understanding the strengths and weaknesses of the EPS measurement is just the beginning.

Learning the factors that affect this metric is crucial. The EPS measurement doesn’t exist in a vacuum, and you should consider the forces that act on it to gain better insights into what EPS depicts, and why. 

Here are the main factors that affect this measure:

• Net income changes: Since EPS is directly calculated from net income, any increase or decrease in your profits will impact EPS. More net income results in a higher EPS, reflecting better profitability.
  
• Changes in number of shares: If your company issues more shares or buys back some of its own shares, the total outstanding shares change, affecting the EPS. Issuing more shares dilutes the reported EPS, while buybacks generally increase it.
  
• Dividend payments on preferred shares: Paying dividends on preferred shares reduces the amount of profit available for common shareholders, which lowers the EPS. The more you pay out in preferred dividends, the less you have to contribute to your EPS.
  
• Accounting practices: The methods you choose for depreciation, inventory management, or recognizing revenue can alter your reported net income. Different accounting choices can lead to different EPS figures, even if the underlying business performance is the same.
  
• Economic conditions: Broader economic factors such as market trends, inflation, and interest rates influence your company’s profitability, thus affecting the EPS. For instance, higher interest rates might increase borrowing costs, reducing net income and EPS.

By keeping an eye on these factors, you don’t view the EPS in isolation and make potentially wrong conclusions that could lead you to the wrong business strategies. These factors tell you the adjusted EPS numbers.

Limitations of EPS as a Profitability Metric

While EPS is a quick and easy metric for gauging profitability, it’s not a silver bullet. This metric has several limitations.

Learning them is important for a more balanced outlook on your profitability, for whatever purposes you may have. 

Here are its common limitations:

• No accounting for capital structure: EPS does not differentiate how the profits are generated – whether through equity financing or debt. This means you might overlook how leveraged (debt-heavy) your company is, which can affect its stability and risk profile.
  
• Ignores market conditions: EPS figures are absolute and don’t consider the economic or market conditions affecting business performance. For example, high EPS in a booming market might be less impressive during economic downturns.
  
• No insight into cash flow: EPS is calculated using net income, which is an accrual accounting figure. This method might obscure the actual cash flow situation, overlooking whether earnings are being collected as cash.
  
• Vulnerable to accounting manipulation: Since EPS is based on net income, it can be influenced by different accounting decisions and techniques. Clever accounting manipulation might give you a distorted view of how well your business is truly doing.
  
• Lacks context. This metric doesn’t provide information on the size of the company or the industry context. A high EPS might seem impressive, but without comparing it to industry standards or considering company size, it’s hard to gauge true performance

Awareness of these limitations lets you use EPS more effectively.

For example, potential investors are going to know those weaknesses too, so they’ll likely want to look at data beyond EPS. For strategy, not considering other metrics can create false scenarios that dominoes to bad decisions.

Alternative Profitability Measures

Since EPS has its own limitations, combine it with other metrics to get a stronger grasp of your business’ performance. 

Here are some to consider:

• Gross Profit Margin: This measure shows the percentage of revenue that exceeds the cost of goods sold. It helps you understand how efficiently you are producing or sourcing your products.
  
• Operating Margin: Also known as operating profit margin, it reflects the percentage of revenue left after subtracting operating expenses. It indicates how well you manage day-to-day expenses while running your business. The operating margin is calculated by dividing the operating income by the revenue and multiplying the result by 100 to get a percentile value.
  
• Net Profit Margin: This shows what percentage of your revenues is actual profit after all expenses. It’s a clear indicator of your overall financial efficiency in generating profit from sales and is a foundation for countless other important indicators of business health like the company’s solvency in regard to existing debt.
  
• Return on Assets (ROA): This metric tells you how effectively your company is using its assets to generate profit. A higher ROA indicates more efficient use of assets.
  
• Return on Equity (ROE): This measures how well your business is generating income relative to the company equity held by shareholders. It’s crucial to evaluate the financial return on the money invested by your shareholders.
  
• EBITDA: Short for Earnings Before Interest, Taxes, Depreciation, and Amortization, this metric provides insight into your company’s operational profitability by removing the effects of financing and accounting decisions.
  
• Current Retained Earnings: This reflects the profits retained since the company’s inception, which can potentially be reinvested in future growth. High numbers are indicative of a company’s security and financial health.
  
• Employee Stock Options: Another aspect to consider is the impact of employee stock options. They represent employees’ ability to purchase company stock at a predetermined price within a specific period. This can dilute existing shareholders’ ownership and affect the value of the company shares.

Each of these metrics can provide a different angle on the company’s current financial standing offering valuable insights that EPS alone might not reveal.

Final Thoughts

Earnings per share is a powerful and versatile metric for an e-commerce business that most business owners tend to overlook. It’s not some all-encompassing measurement, though – you have to be aware of its limitations and use other alternatives too.

This article is the best resource for learning how to use the EPS for your e-commerce business. With this, you can use EPS to improve your business today!