Updated Mar 23, 2022
What are Earnings Per Share (EPS)?
What are Earnings Per Share?
Introduction
An organisation's profitability and market share depend on many factors. It is important to aggregate all of them to consolidate them into one report. It helps to know whether it is making a profit. One thing to remember is that a company's profit is not solely for its employees and reputation. It is also for the shareholders who hold a certain amount of the company shares they had invested into.
Many of these shareholders have some stake in the company, and if they are not making good returns on their investments, they are more likely to withdraw their funds. Hence, a ratio called Earnings Per Share (EPS) is calculated frequently to learn an organisation's financial health.
What are Earnings Per Share?
Earnings per Share refers to a company's profit distributed among its shares. This may sound simple enough, but delving deeper into it, it can have many layers that investors need to understand on an individual level. It will ensure that they are investing in the right company.
What are the Types of Earnings Per Share?
Although investors do not pay much attention to the EPS, higher Earnings per Share ratio often means that the company's stock price is rising. It could be a factor to consider, but it is not the only aspect that affects investors' decisions when determining the company's profitability. The main types of EPS variation are:
- Reported EPS
This variation of EPS is determined through general accounting principles and is treated as a one-time expense. It depends on whether it is unusual income or operating income. If the expense is treated as operating income, the EPS could rise.
- Ongoing EPS
This is also known as Pro forma EPS. Also, the expenses in this case are only one-time expenses. The resulting number, which is calculated, is based on the net income and excludes any other unusual expenses.
- Book Value EPS
It enables investors to compute the average number of equities in each Share it holds. It Indicates an organisation's net asset value. I.e. Total assets subtracted by Total liabilities.
How are Earnings Per Share Calculated?
To estimate the EPS ratio, the company's profits are divided by the total number of outstanding shares in the common stock. Earnings Per Share is used to calculate a company's profit on each share and how much each outstanding share is worth. The below formula represents an easy and efficient way of computing the EPS ratio.
To illustrate this formula, assume that a company has $10 M in net income and $5 M as preferred dividends for a certain quarter. Assuming that the company has $1 M in outstanding shares, the EPS can be valued at $5.
Why are Earnings Per Share Important?
With a clear idea of the EPS ratio, investors know whether the company is worth putting money into. The main reasons why it is important to know about EPS are:
- It helps investors gauge whether the company they are investing in will make more income and also indicates the possibility of a larger dividend payout in the future.
- It helps investors in making a more informed decision based on data.
- The EPS is an important tool in determining its current and anticipated stock value and whether it will perform better or worse in the stock market.
- EPS also helps track a company’s past performance of whether it would be a reliable investment choice.
Conclusion
As a concept, Earnings Per Share may seem easy enough to understand. However, it is more complicated than it looks. To calculate whether the company has outstanding shares and how many of them can be difficult to determine. Another factor that influences the EPS ratio is the consideration of expenses, whether they are one-time or ongoing expenses. With so many variations of the EPS ratio, many investors can get confused, resulting in an unsure decision about whether to invest in the company or not. This means that when they put their money into the company, they need to be sure that the EPS is good and rising; otherwise, it may create problems for them.
