Full Form Of Eps Earnings Per Share Why Its Important

The Full Form of EPS stands for Earnings Per Share. EPS is the ratio of net income to the total number of ordinary shares issued by the company. This is the ratio that generally indicates the profitability of the business.

Objective

The broad objective of the EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more is to indicate the profitability of the businessProfitability Of The BusinessProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more.The business may report EPS after adjusting extraordinary line items, followed by potential adjustments. If the EPS is high, it indicates that the overall profitability of the business has appreciated over time.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Full Form of EPS (wallstreetmojo.com)

Determine EPS

The eps can be determined as per the relationship described below: –

Earnings Per Share = Net Income / Total Number of Shares Outstanding

At times EPS could be determined using the weighted average of the outstanding sharesWeighted Average Of The Outstanding SharesWeighted Average Shares Outstanding is a calculation used to estimate the variations in a Company’s outstanding shares during a given period. It is determined by multiplying the outstanding number of shares (consider issuance & buybacks) in a given reporting period with their individual time-weighted portions. read more.It accounts for the stock splitsStock SplitsStock splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. read more and stock dividendsStock DividendsA stock dividend refers to bonus shares paid to shareholders instead of cash. Companies resort to such dividends when there is a cash crunch. Shareholders are allotted a certain percentage of shareholding.read more during the accounting period.It could be adjusted for preferred dividendsPreferred DividendsPreferred dividends refer to the amount of dividends payable on preferred stock from profits earned by the company, and preferred stockholders have priority in receiving such dividends over common stockholders.read more and extraordinary itemsExtraordinary ItemsExtraordinary Items refer to those events which are considered to be unusual by the company as they are infrequent in nature. The gains or losses arising out of these items are disclosed separately in the financial statement of the company.read more.The formula of EPS that accounts for the preferred dividends and extraordinary items can be expressed as follows: –

Earnings Per Share = (Net Income – Preferred Dividends – Extra-ordinary Items) / Total Number of Shares Outstanding.

Types of EPS

Two broad types of EPS are classified as basic EPSBasic EPSBasic EPS represents the income of the company for each common stock. In other words, it is the value appreciation of the common shares resulting from equal distribution of the company’s profit as dividends among the common stockholders.read more and diluted EPSDiluted EPSDiluted EPS is a financial ratio to check the quality of the Earnings per Share after taking into account the exercise of Convertible Securities like Preference Shares, Stock Option, Warrants, Convertible Debentures etc.read more.

#1 – Basic EPS

The basic eps only focus on the total number of outstanding common shares.The basic eps do not account for any stock dilutions or conversion.

#2 – Diluted EPS

The diluted EPS focuses on the dilutions arising out of the stock conversions and splits that can affect the value of the earnings per share.It comes into picture when there are stock optionsStock OptionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read more and warrants etc.Determining diluted EPS happens by accounting for warrants, convertibles, and options.Whenever options, warrants, and convertibles are exercised, they deduct from the basic earnings per share.After exercising optionsOptionsOptions are financial contracts which allow the buyer a right, but not an obligation to execute the contract. The right is to buy or sell an asset on a specific date at a specific price which is predetermined at the contract date.read more, warrants, and convertibles, the total number of issued sharesIssued SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more tends to appreciate, thereby reducing the overall earnings per share.It is a key metric for a business with a complex capital structureCapital StructureCapital Structure is the composition of company’s sources of funds, which is a mix of owner’s capital (equity) and loan (debt) from outsiders and is used to finance its overall operations and investment activities.read more.

Examples of EPS

Below are the examples of earnings per share –

Example #1

Let us take the example of the company ABC. During the year, the company generates a net income of $50,000,000. The company, as of date, has issued 5,000,000 shares. Help the management determine the earnings per share.

Solution

Calculation of earnings per share is as follows,

= $50,000,000 / 5,000,000EPS =$10.

Therefore, the business has eps of $10.

Example #2

Let us take the example of company XYZ. During the year, the company generates a net income of $25,000,000. The company, as of date, has issued 2,000,000 shares. After the event of dilution, the business now has 2,500,000 outstanding. Help the management determine the basic and diluted earnings per share.

= $25,000,000 / 2,000,000Earnings Per Share =$12.5
= $25,000,000 / 2,500,000EPS =$10

Therefore, the business has the basic earnings per share of $12.5 and diluted earnings per share of $10.

The dividend per shareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more is defined as the ratio of the dividend paid to the stockholders to the total number of common shares.However, it takes into account the net income.Industry uses both metrics to analyze the profitability of the business.However, in the case of dividend per share, dividends are payable to the stakeholders from the portion of the net income.

Importance

The earnings per share is an important metric for investment analysisInvestment AnalysisInvestment analysis is the method adopted by analysts to evaluate the investment opportunities, profitability, and associated risks in their portfolios. In addition, it helps them to determine whether the investment is worth it or not.read more as it helps in a comprehensive analysis and evaluation of the investment. However, since the metric is open for manipulation, investors should not rely on this metric alone. They should supplement it with additional metrics that help in the investment evaluation.

Benefits

Earnings per share convey how much [wsm-tooltip header=“Residual Income” description=“Residual income refers to the net earnings an organization possess after paying off the cost of capital. It is acquired by deducting the equity charges from the company’s net profit or income.” url=“https://www.wallstreetmojo.com/residual-income-formula/"]residual incomeResidual IncomeResidual income refers to the net earnings an organization possess after paying off the cost of capital. It is acquired by deducting the equity charges from the company’s net profit or income.read more[/wsm-tooltip] or earning each shareholder is liable to get.

It is an important metric used for industry analysis.It is also used in the ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company’s financial performance. It provides valuable information about the organization’s profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more for comparable periods.

Limitations

It can be distorted or misrepresented if the company pursues any buyback of sharesBuyback Of SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more.Since the business can exercise its discretion on what they want to report on earnings per share could, therefore, make this metric open for huge manipulation.It does not broadly account for financial leverageFinancial LeverageFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more or lets the investor know the impact of the leverage on the earnings.

Conclusion

The earnings per share are the ratio financial analysts and investors use in investment and profitability analyses. It is normally computed as the ratio of net income to the total number of issued common shares. It helps in letting each investor know how much he is liable to get from the business in the form of earnings.