What is Earnings Per Share or EPS?
To calculate earnings per share (EPS), you need to divide a company’s profits by its common stock's total outstanding shares. The result offers general insight into the company’s profitability. In simple words, EPS means how much money a company makes for each share and is primarily used for estimating corporate value. increasing EPS implies the company is becoming more profitable and vice versa.EPS Formula
Here’s how you can calculate the EPS: Let’s take an example – A company, ABC, reports a net income of $12M and announces $2M in preferred dividends for its fiscal Q1. During the period, the company had 5M (weighted average) outstanding shares. The EPS of the ABC company as per the formula mentioned above would be EPS = $ (12M - 2M) / 5M = $2 It is advisable to use a weighted average number of outstanding common stock over the reporting term as the actual number of shares can vary over time.
Understanding EPS
The EPS metric is one of the most significant variables in shaping a stock price. It is also an important component used for calculating the price to earnings (P/E) valuation ratio. In the P/E ratio, the E stands for EPS. By dividing a company’s stock price by its EPS, you can calculate the share value in terms of how much the market can afford to pay for each earned dollar. It is essential to judge EPS with respect to the company’s stock price, P/E ratio, or earning’s yield. A low EPS number compared to the last quarter might still lead to a surge in share price if analysts were expecting a worse figure.Significance of Earnings Per Share
Limitations of Earnings Per Share
Although EPS is a useful financial tool, it still has limitations. Some of them are:
Before selecting any stock for investment , you should also consider other factors such as company stability, relative strength in the industry, debt to equity ratio, and P/E ratio, among others. If the EPS aligns with these factors, you will have a clearer idea of its market performance, profitability, and overall scope.
Earnings Per Share: Definition, Formula & Its Significance - Winvesta (2024)
Table of Contents
What is Earnings Per Share or EPS?
EPS Formula
Understanding EPS
Significance of Earnings Per Share
Limitations of Earnings Per Share
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