Earning Per Share (EPS) –
Earning per Share is a very important metric in company’s earnings which indicates profitability of a company. This ratio shows us how much company earns money per share.
If EPS of company A is 10, it means company earns Rs 10 per share and If EPS of company B is 15, it means company B earns Rs 15 per share. So we can see company B earns more money than company A. This helps to understand profitability of company. This ratio helps us to compare companies within same sector.
The formula is shown below
Earning Per Share = Net Profit / Total Outstanding shares
Lets take examples
If we study above examples, we can see company A has net profit of Rs 100cr while their total outstanding shares are 10cr, so the EPS of company A is 10.
Company B has net profit of Rs 100cr while total outstanding shares are only 5cr, so EPS of company B is 5.
Company C has net profit of Rs 50cr while total outstanding shares are only 2.5cr, so EPS of company C is 20.
Observe company A and Company B have made same profit but due to different number of outstanding shares EPS of company A is 10 which is greater than company B which shows company A is more profitable than company B because company A has earned Rs 10 per share while company B has earned Rs 5 per share.
If we observe about company C, company C has made less profit which is Rs 50cr than both A and B but EPS of company C is more than both A and B because of less total outstanding shares which are 2.5cr.
Earning per Share has some drawbacks which are
- It doesn’t tells us about company’s debt.
- It can be affected by change in accounting policy.
- It can be vary by mergers and acquisitions.
- It can be vary because of buyback.
EPS formula can be adjusted because of preferred dividends and capital structure.
EPS is used to calculate price to earning ratio.
We will discuss these in later posts.