Earnings Per Share Definition and Example
Earnings Per Share definition – “A company’s net income divided by the number of shares outstanding. One of the most common indicator of a public company’s financial performance”.
It is one of the tool to measure the financial performance of an organization. This is used by each and every investor who is thinking of buying a share of a certain organization. It is also known as market prospect ratio. As it is used for the calculation of net profit or income earned from the outstanding shares in the market.
In simple words EPS is the amount of money that each share earns if all the profit is distributed to the outstanding shares floating in the market at the end of the year. In addition to this, EPS also tells the profitability of an enterprise on the basis of shareholders. One can easily compare the EPS of a large company with that of a small company. The outstanding shares may vary so are the number of shareholders in which it is to be distributed.
Earnings Per Share Formula
EPS = (Net Income – Preferred Dividends)/ Weighted Average shares outstanding
Here, preferred dividend is excluded as EPS is the measure of income available to the common shareholders.
On the other hand, weighted average outstanding shares is the addition of outstanding shares in the beginning and at the end divided by 2. Here weighted average shares are taken as during the year, companies either issue new stock or buy back their existing shares.
Earnings Per Share Example
To understand the earnings per share definition more clearly, let’s have a look over an example.
The net income of ABC Ltd is say Rs. 1,00,000. There are no preferred shares or dividends outstanding. The stock outstanding are 1,000.
So, the earnings per share = 1,00,000/1,000
= Rs. 100
Related Financial Terms of Earnings Per Share
- Income Statement Definition, Meaning | Format | Importance
- Gross Profit Definition – Meaning, Example and Importance
Interpretation of Earnings Per Share
Just like other market prospect ratio, it also measures the profitability of the business. Higher EPS is always good as compare to lower one. Higher ratio means company is not only profitable but it has more money or profits to distribute among the shareholders.
It also directly affect the price of a company’s share. The share price of such companies increases. But this is not the only measure to buy a share. There are various factors which could affect EPS. So, investors do not forget to look over other profitability measures before going for buying a stock.