Earnings Per Share (EPS)

What Are Earnings Per Share?

The earnings per share of a business refer to that which is calculated quarterly or yearly by dividing the net income by the number of outstanding stock shares. It usually serves to gauge how profitable an enterprise is. The higher the EPS of the organization, the more profitable it is considered to be.

Deeper Definition

The earnings per share indicate how much money a company makes per share of its stocks, and it is often used as an index to determine the overall valuation of a company. It can also be calculated by making slight tweaks to the numerator and denominator in the case of shares created through options, convertible debt, or warrants.

In calculating the earnings per share, it is possible for extraordinary items or discontinued operations to be excluded or for the calculation to be done on a diluted basis, that is, taking shares that are not currently outstanding but could become outstanding if stock options and other securities that can be converted are exercised.

In calculating the organization’s EPS, balance sheets and income statements are often used to calculate the number of common shares, dividends paid on stock, and net income or earnings. However, weighted averages are used to obtain the number of common shares when the report arrives at more accurate results, significantly as the number of shares can change over time. Earnings per share are commonly used such that the absolute value of companies can be determined using the price-to-earnings valuation ratio system. As such, each investor can determine the value of the company’s stock by assessing how much the market is ready to pay for every dollar earned. Earnings per share operate such that shareholders do not have direct access to the profits. Thus, a portion of the earnings may be distributed, and the company will withhold the rest.

Example Of Earnings Per Share