What is Earnings per Share?
Earnings per share (EPS) is a key financial metric that is essential for investors and potential shareholders when considering a company’s financial performance. It provides a snapshot into how much profit is generated for each share of stock. The calculation of EPS involves dividing a company’s net income by its outstanding shares of common stock. By understanding the components of the equation and how EPS can be used, investors can gain valuable insight into how their holdings are performing.
How is EPS Calculated?
EPS can easily be calculated as long as the necessary financial information is available. It is determined by taking a company’s total net income and subtracting the amount of dividends paid to preferred stock, if applicable. This number is then divided by the number of outstanding shares of common stock. The resulting figure is the EPS, which gives investors a glimpse into the company’s profitability per share of common stock.
How Can EPS be Used?
EPS can be used to compare potential investments and to determine how the stock is performing relative to the market. Investors can compare the EPS of different companies in the same industry to see how they measure up to their competitors. For example, a company that has higher EPS than other competitors in its industry may be a more attractive option for investors. Additionally, by comparing the current EPS of a company to the EPS of the same company in the past, investors can track the performance of their holdings. EPS is an essential measure for investors and should be monitored closely.
In conclusion, earnings per share is a vital financial metric that can provide investors with valuable insight into a company’s performance and profitability. By understanding how EPS is calculated and what it can be used for, investors can make decisive and profitable investments. Understanding EPS, along with other important financial metrics, is the first step in successful investing. The earnings per share formula is:
Earnings per Share = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares
Net income is a company’s total earnings after subtracting expenses, taxes, and other non-cash deductions. Dividends on preferred stock are payments made to certain shareholders who hold the preferred stock of a company. Average outstanding shares is calculated by adding the average number of shares outstanding over a specific period of time and then dividing that number by the number of periods in the time frame.