What Is Earnings Per Share

What Is Earnings Per Share?

Earnings Per Share (EPS) is a financial metric that shows how much of a company’s profit goes to each share of common stock that is outstanding. It shows how profitable a company is and is often used by investors to judge how well a company is doing financially. 

Content:

Earnings Per Share Meaning

Earnings per share is a key metric for investors as it shows how much money a company makes per share. EPS is a standard way to compare the profitability of different companies or the same company over time. It is calculated by dividing a company’s net income by the number of shares it has on the market.

For example, if Company A reports a net income of ₹10 million and has 1 million outstanding shares, the EPS would be ₹10. This allows investors to compare Company A’s profitability with Company B, which might have a different net income and number of shares.

Earnings Per Share Example

Consider a detailed case study of Reliance Industries Limited, one of India’s largest companies. In the fiscal year 2020-21, Reliance reported a net income of Rs 53,739 crore. With 3,243 crores of outstanding shares, the EPS would be calculated as follows:

EPS = ( Rs 53,739 crores/ 3,243 crore) 

        = Rs 16.56/ share

This EPS value helps investors measure the profitability of Reliance Industries compared to other companies or its own past performance.

Earnings Per Share Formula

EPS Formula = (Net Income – Dividend on Preferred Stocks/ Number of Outstanding shares)

Types Of Earnings Per Share

There are five main types of earnings per share (EPS):

  1. Reported EPS or GAAP EPS is the most common type of EPS. It is calculated using the net income of a company, divided by the weighted average number of shares outstanding.
  2. Ongoing EPS or Pro Forma EPS excludes unusual one-time gains or losses from the calculation of EPS. This can give investors a better idea of the company’s underlying earnings performance.
  3. Retained EPS is calculated by taking the net income of a company and subtracting the dividends paid to shareholders. This shows how much of the company’s earnings are being retained for future growth.
  4. Cash EPS is calculated by taking the operating cash flow of a company and dividing it by the weighted average number of shares outstanding. This shows how much cash the company is generating from its operations.
  5. Book Value EPS is calculated by taking the book value of the company’s equity and dividing it by the weighted average number of shares outstanding. This shows the theoretical value of each share of the company’s stock.

Diluted EPS vs. Basic EPS

The main difference between Diluted EPS and Basic EPS is that Diluted EPS takes into account convertible securities, while Basic EPS does not.

ParameterBasic EPSDiluted EPS
Formula ComponentsOnly considers outstanding sharesIncludes convertible securities
ComplexitySimplerMore complex
Investor InterpretationConservative estimateOptimistic estimate
Use CaseGeneral profitability assessmentComprehensive analysis, including future scenarios
RiskLowerHigher, due to potential dilution

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What Is Earnings Per Share – Quick Summary

  • Earnings Per Share (EPS) is a financial metric that shows how much of a company’s profit goes to each share of common stock.
  • EPS provides a standardized way to compare the profitability of different companies or the same company over different periods.
  • The formula for EPS is straightforward and involves net income, dividends on preferred stock, and the number of outstanding shares.
  • There are two types of EPS: Basic and Diluted, each with its own calculation method and use-cases.
  • The main difference between Diluted EPS and Basic EPS is that Diluted EPS includes convertible securities while Basic EPS doesn’t.
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Earnings Per Share Meaning – FAQs  

What is earnings per share?

EPS is a financial metric that shows how much money a company makes per share.

What is a good EPS ratio?

A good EPS ratio is what generally indicates better profitability, but it’s essential to compare it with industry peers for a more accurate assessment.

What does a higher EPS mean?

A higher EPS suggests that a company is more profitable, which often leads to increased investor confidence and higher stock prices.

How do you calculate EPS per share?

Here are the different ways to calculate EPS:

  1. Basic EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding
  2. Diluted EPS = (Net Income – Preferred Dividends) / (Weighted Average Shares Outstanding + Dilutive Securities)
  3. Continuing Operations EPS = Income from Continuing Operations / Weighted Average Shares Outstanding
  4. Trailing EPS = Sum of EPS for the last 4 Quarters / 4
  5. Adjusted EPS = (Net Income – One-time expenses or revenue) / Weighted Average Shares Outstanding

Is more EPS good?

A higher EPS is generally considered good as it indicates higher profitability, but it should be analyzed in the context of other financial metrics.

Why is EPS important?

EPS is important because it provides investors with a standardized measure of profitability, aiding in investment decisions.

Is a higher or lower EPS better?

In general, a higher EPS ratio is considered to be better than a lower EPS ratio. This is because a higher EPS ratio indicates that the company is more profitable. However, it is important to note that a higher EPS ratio does not always guarantee future success.

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