What is Earnings Per Share (EPS)
Earnings per share measure the net income earned for each common stock, it shows how much money a company made in a specific time period compared to how much investors put in. The earnings per share (EPS) can be calculated by dividing the net income available to common shareholders by the weighted average common shares outstanding.
The higher earnings per share, the higher profits to shareholders. Additionally, the good value of earnings per share (EPS) should increase annually.
EPS or Earnings per share is a tool to evaluate the return that the investors will receive for each common stock they are invested in. Normally, it uses to determine a company’s stock prices, investors will compare the company’s EPS with the stock price to determine the value of earnings per stock to predict the future growth of a stock.
Earnings per Share Formula
Earnings per share (EPS) can be calculated by dividing the net income after deducted by preferred dividends by the common shares outstanding during the year, or the following earnings per share formula:
EPS = (Net Income – Preferred Dividends) / Average common shares outstanding
or;
EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding
For example, if a company has $100 in net income and 100 shares were sold, the EPS would be 1.
Uses of Earnings per Share
Earnings per share is a key indicator of a company’s financial health and performance. Investors may use EPS as an indication of whether a company is undervalued or overvalued. EPS may also be used as a framework to compare the relative strengths of different companies.
An underperforming company may have lower EPS because its expenses are higher than the revenue they bring in.
EPS is a way for financial professionals to compare companies. The main uses of EPS are:
- To measure a company’s profitability.
- To gain insight into how much money a company makes.
- To compare a company’s profitability to its industry.
- To compare the profitability of a company to the overall market.
FAQs
Earnings per share is a financial ratio that measures the net income earned for each common stock.
Earnings per share (EPS) can be calculated by dividing the net income after deducted by preferred dividends by the common shares outstanding during the year.
