Saturday, May 2, 2015

Earnings Per Share - EPS

Definition of 'Earnings Per Share - EPS'

The portion of company's profit allocated to each outstanding share of common stock, Earnings per share serves as indicator of a company's profitability,

Calculated as:

                    = Net Income-Dividend on Preferred Stock

                      -----------------------------------------------------
                      Average Outstanding Shares


When calculating, it îs more accurate to use a weighted average number of shares outstanding over reporting term, because the number of shares outstanding can change over time, However, data sources sometimes simplify calculation by using number of shares outstanding at end of period,

Diluted EPS expands on basic EPS by including shares of convertibles - warrants outstanding în outstanding shares number, 

Expertsmind,com explains 'Earnings Per Share - EPS'

Earnings per share îs generally considered to be single most important variable în determining share's price, It îs also major component used to calculate price-to-earnings valuation ratio, 

 

For example, assume that company has net income of $25 million, If company pays out $1 million în preferred dividends and has 10 million shares for half of year & 15 million shares for other half, EPS would be $1,92 (24/12,5), First, $1 million îs deducted from net income to get $24 million, then weighted average îs taken to find number of shares outstanding (0,5 x 10M+ 0,5 x 15M = 12,5M),


An important aspect of EPS that's often ignored îs capital that îs required to generate earnings (net income) în calculation, Two companies could generate same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be "better" company, Investors also need to be aware of earnings manipulation that will affect quality of earnings number, It îs important not to rely on any one financial measure, but to use it în conjunction with statement analysis & other measures, 

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