Earnings per share

Earnings per share
Source: Tavaga

Earnings per share or EPS is the bottom line (ie. profit value) in the Income Statement of a company divided by the total number of shares of the company.

How is EPS calculated?

Source: Tavaga

What does EPS mean?

EPS shows the net income of the company that each unit of the stock is entitled to. If the profits get distributed among the shareholders, EPS shows the amount a share will earn.

What is diluted EPS?

In diluted EPS, the no. of shares in denominator increases as it also takes into account the shares that would arise from bonus shares, stock split, Employee Stock Option Scheme, Contingent issues, Share warrants and convertible preference shares & debentures. Even the numerator is adjusted accordingly i.e., the interest expenses of those convertible debentures and dividend expenses of convertible preference shares are added back.

What is a negative EPS?

When the earnings of a company are negative, the EPS would also be negative. It would be depicted as NA. It implies that the company has not generated enough earnings so as to offset the risk taken by the investors. Higher the EPS, the better it is. Before investing, an investor should compare the EPS of at least the past five years and make decisions solely on the basis of the previous year’s EPS.

How is EPS used?

One of the most crucial metrics used to assess a company’s profitability on an absolute basis is earnings per share. It plays a significant role in determining the price-to-earnings (P/E) ratio, where the EPS is the “E” in P/E, and the P/E ratio shows the value of a stock in terms of how much the market is ready to pay for every earnings. EPS can also help in picking stocks for investment.