In simple terms, EPS is a part company’s profit allocated to every individual share of the stock. Earnings per share denote the profitability of a stock company. Earnings per share are one measure of a company’s profitability. Diluted EPS means that all the stock options, convertible debentures, etc. have been converted to share and it is bad news of the worst-case scenario.
Earnings per share(EPS) infographics by Kamlesh Rode
The earnings per share are also known as Net profit per share because it determines earning or income of one single share and it is used to calculate corporate value. The main objective of calculating this ratio is to estimate the profitability of the company on equity shares.
The higher the EPS better is the performance of the company. The increase in EPS means the company pays more dividends and bonuses to shareholders. The companies in the sector are also differentiated by the earnings per share in their respective sector.
EPS shows that where a company stands in the respective sector. So, EPS is an essential ratio used in the financial analysis of a set of financial statements.
This ratio is, however, so useful and popular. Many investors never avoid such important value before going to any investments.
Earnings per share is a formula used to get a financial ratio. This financial ratio is calculated to denote a firm’s ability to produce net profits. It is always shown as a currency per share. EPS is calculated as:
EPS = net income ÷ average outstanding common shares
For example: For a company with a net profit of 1 crore and an outstanding share of 5 lacs, the EPS would be Rs.20 (Rs.1 Crore/5lacs)
Higher EPS denotes higher profitability of the company and better earnings of the stockholder. The formula for Earnings per share (EPS) is to get the net income and divide it by a number of shares. Earnings per share are proportional to profitability.
Importance of EPS
1. Earnings per share is a very important metric, it is the profit you get per share.
2. Earnings per share is one measure of a company’s profitability. Diluted EPS means that all the stock options, convertible debentures, etc. have been converted to share and it is bad news of worst-case scenario.
3. It shows the company’s earnings to make your future investment decisions.
4. It is the primary fundamental metrics investors always use when trying to determine how much to pay for a stock.
5. Earnings per share points in how many years the company would pay its price.
6. If earnings per share (EPS) is low, it denotes problems in the company
7. EPS affects investors in the sense of potential share price and potential dividends.
1. Mainly company’s profitability affects EPS most. The less profit less will be earnings per share.
2. Company can increase its EPS by increasing its Net profit. For that company can also repurchase its own stocks. These both case, the EPS ratio increases and getting the right company that does both is very good for future investments.
3. Companies that reinvest earnings in expanding their operations results in high earnings per share(EPS)
4. Zero or almost zero debt companies have good earnings per share.
5. Earnings per share increases when the total number of outstanding shares decreases in case of buyback. When expenses decreases and the company is able to cut the cost then also the earnings of the company increases with increase in sales.
Difference between EPS and dividends
|Earnings per share||Dividends|
|Refers to profit after tax that is to be distributed among shareholders||It is actually money given to the shareholders in the form of cash, stocks, or bond|
|Earnings per share are calculated with respect to the profitability of the company. It is not directly given in cash.||Here, the company may or may not pay dividends to shareholders.|
|Earnings per share have an impact on dividends||But here distribution of dividends does not have any impact on EPS.|
|EPS is what the company makes per share based on accounting net profit||The dividend is what the company decide to return to the shareholders as a cash payment|
|EPS is a company’s earnings per share of outstanding stock for a specific time.||The dividend is the amount if any, it pays to its stockholders.|
The higher the EPS better is the performance of the company. The increase in EPS means the company pays more dividends and bonuses to shareholders. The companies in the sector are also differentiated by the earnings per share in their respective sector. EPS shows that where the company stands in the respective sector. So, EPS is an essential ratio used in the financial analysis of a set of financial statements. This ratio is, however, so useful and popular. Many investors never avoid such important value before going to any investments.
According to my earnings per share is may be related to the profit you are making per share.
For example, You bought 100 shares at Rs10, and now it’s trading at 12, so Rs2 /- you are earning per share. Earnings per share is an important factor in the fundamental analysis of a company. Read more about fundamental analysis through infographics.
Frequently asked questions(FAQs)
Ans: An EPS rating of above 80% to 99% denotes the company is growing in profits. Maximum earnings per share denote the company’s profitability.
Ans: EPS is calculated as EPS = net income ÷ average outstanding common shares
Ans: High EPS is a good thing that denotes profits per share a user can get. EPS is good when it’s growing with time. Bajaj finance have good EPS of more than 5% and it is better than other companies in the NBFC sector
Ans: A negative EPS means the company is operating in loss and negative EPS is an alarm for the investors.
Ans: We always have a go for this online EPS calculator.