Earnings per share (EPS) defines as a segment of a company’s earnings in other words company’s profits per outstanding share of common stock. Earnings per share is one of the indicators which is used to measure company’s profitability.
Preferred stock rights have priority over common stock. Subsequently, profits on preferred shares are subtracted before computing the EPS. At the point when preferred shares are cumulative, yearly profits are deducted regardless of whether they have been declared. When working on EPS calculation, dividends on arrears are not or less relevant to Earnings Per Share Formula.
Earnings Per Share Example-1: Assuming it’s a final quarter, Company ABC revealed net income of Rs. 4 billion. Amid at a similar time, the organization had an aggregate of 10 billion shares outstanding. In this specific case, the organization’s quarterly earnings per share (or EPS) would be Rs. 0.40, EPS is calculated as: Rs.4 billion / 10 billion shares = Rs. 0.40
EPS Example-2: Assuming that XYZ Company has net income after tax of Rs. 1,000,000 and also has to pay Rs. 200,000 as a preferred dividends. The average number of common shares outstanding in this period was 400,000 shares. In such case, ABC’s earnings per share ratio is calculated as (Rs.1,000,000 Net Income – Rs.200,000 Preferred dividends) ÷ 400,000 common outstanding shares. So as per the calculation EPS would be Rs.2.00 per share.
Earnings Per Share Example-3: Let’s take 2 companies to analyze, Company Alpha Ltd. & Company Beta Ltd. Let’s calculate EPS for this companies and find out what is a good EPS ratio.
|Company – Alpha||Company – Beta|
|Profit during financial year:||2,00,000||10,00,000|
|Number of Shares Outstanding:||50,000 shares||5,00,000 shares|
|EPS Calculation:||2,00,000 / 50,000||10,00,000 / 5,00,000|
|EPS Ratio:||Rs. 4 Per Share||Rs. 2 Per Share|
What’s a Good EPS Ratio?
An organization with a high earnings per share or high EPS ratio is much more capable of profit and paying dividend to investors, or it might invest profits in the assets once again into its business for more development; in either case, a high proportion shows a possibly beneficial investment choice, depending upon the market value of the stock.
Earnings per share (EPS) is considered as absolute most essential indicator in deciding a share’s price. It is additionally another major part used to compute the price-to-earnings (P/E) ratio, where the ‘E’ in P/E refers to Earnings Per Share. By partitioning an organization’s share cost by its earnings per share, a financial investor can determine the fair value of a stock as far as what the market will pay based on an company’s present earnings.
The EPS is an essential principal utilized in esteeming an organization since it separates a company’s benefits on a for every share premise. This is particularly critical as the quantity of shares outstanding could change, and the aggregate earnings of an organization probably won’t be a measure of profitability.