What is EPS ?
EPS or simply earning per share is the company’s net profit divided by total outstanding share of the company over a certain period of time that may be quarterly, half-yearly or annualy.
With higher EPS the company is considered as more profitable than the company with lower earning per share. Sometimes company posts EPS by adjusting diluted shares and extra-ordinary items.
What is the Formula of EPS ?
EPS formula can be derived as Net profit of the company minus Dividend yield divided by Total outstanding shares.
Calculation Of EPS – Earning Per Share:
To calculate Earning per share (EPS) balance sheet and profit & Loss statements of the company/ firm are used. Things we need are Net profit/ Total income of the company, preferred dividend paid if any and weighted average outstanding share. By implementing above EPS formula we can calculate the earning per share.
Suppose ABC limited posted a net profit of $25 million and spend $5 million of dividend, total outstanding share of the company is 2 million for a quarter, then what will be company’s EPS for that quarter?
Earning per Share (EPS) = Net profit- Dividend / Total outstanding share
EPS of ABC limited= $25 million-$5 million/2 million =20/2= $10
Why EPS is important?
- Profitability of the company: Earning per share (EPS) is the key parameter which shows the profitability of the company, means how much the company is earning for an individual share the investor is paying for. With higher EPS company earns the investor’s confidence which leads price appreciation of the company’s share and with lower EPS company loose the investor’s confidence which leads the price depreciation.
- Ratio Calculation: Price earning ration or simply P/E ratio is calculated by using EPS of the company, as E in P/E ratio refers to earning per share (EPS). P-E ratio is extremely important to calculate the valuation of the company and how the investor is paying for the company’s share.