Earnings Per Share

EPS or Earnings Per Share is the company’s net profit divided by the number of outstanding common shares. It serves as an indicator of a company’s profitability. It helps in estimating a corporate value of a company.

EPS can arrive as excluding extraordinary items or discontinued operations or on a diluted basis. It is valuable when compared to competitor metrics, other companies of the same sector, or a certain period. Higher the EPS, higher the company’s value. A good EPS is the recent performance of the company, the competitor’s performance and the expectations of the analysts who follow the stock.

Example to Calculate Earnings Per Share

XYZ has a net income of Rs10 lakh in the first quarter. The company announces dividends of Rs250,000. Total shares outstanding is at 10,000,000.

The EPS of XYZ. would be:

​EPS = (Rs10,00,000 – Rs2,50,000) / 10,000,000

EPS = Rs0.075

A single EPS value for one company is somewhat arbitrary. The number is more valuable when analyzed against other companies in the industry, and when compared to the company’s share price (the P/E Ratio). Between two companies in the same industry with the same number of shares outstanding, higher EPS indicates better profitability. EPS is typically used in conjunction with a company’s share price to determine whether it is relatively “cheap” (low P/E ratio) or “expensive” (high P/E ratio).

Types of EPS

• Primary EPS

• Diluted EPS which includes options, convertible securities, and warrants outstanding that can affect total shares outstanding when exercised. Investors prefer diluted EPS the most, but sometimes both are identical.

Before judging the company’s merit as an investment option, investors must also keep an eye on several other essential factors.

In fact, they should match Earnings Per Share with other various financial parameters to get a fair business idea and its overall scope, profitability, and performance.