Earnings per share (EPS) is the company’s net profit available to equity shareholders (common stockholders) divided by the number of outstanding common shares.
EPS is reported on the face of the income statement / profit & loss statement.
How EPS is calculated?
Earnings per share (EPS) (also known as Basic EPS) is calculated as under:
Basic EPS = (Net income – Preferred dividends) / Weighted average number of shares outstanding
The weighted average number of shares outstanding is calculated by the length of time each quantity of shares was outstanding during the year.
Example: A company has reported following numbers on 31.12.20X1:
| Particulars | $ |
|---|---|
| Net income (PAT) | 1,300,000 |
| Preference shares 10%, 2,000,000 shares of $1 each | 2,000,000 |
| Common stock outstanding on 01.01.20X1 400,000 of $1 each | |
| Common stock issued on 01.07.20X1 400,000 | |
| Common stock repurchased on 01.10.20X1 200,000 | |
| Common stock outstanding on 31.12.20X1 600,000 |
Step 1: Calculation of weighted average number of shares outstanding:
| 400,000 shares * 6/12 | 200000 |
| 8,00,000 shares * 3/12 i.e. (400,000+400,000) | 2,00,000 |
| 6,00,000 shares * 3/12 i.e. (800,000-200,000) | 1,50,000 |
| weighted average number of shares outstanding | 5,50,000 |
Step 2: Net profit available to equity shareholders = PAT – Preference shares dividend
= 1,300,000 – 200,000* = 1,100,000
Step 3: Basic EPS = 1,100,000 / 550,000 = $ 2
*10% of $ 2,000,000 Preference shares capital
Utility of EPS
- A comparison of year on year EPS growth indicates that profit per share is increasing which is positive for investor and vice versa.
- From investor perspective, EPS indicates how much profit is earned on each share.
- EPS is used an input into the price/earnings ratio.
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