EPS stands for earnings per share. It is calculated by dividing net earnings available to common shareholders by the average number of outstanding shares over a given period of time. The earnings per share (EPS) is normally measured on a quarterly or annual basis. Earnings per share, or EPS, is a key financial metric that shows a company’s profitability and tells investors whether the company is a good investment.
It’s Market investors use a popular method to assess a company’s profitability before investing in its stock.
It is a concept that is extremely important to stock market investors and traders. The higher a company’s earnings per share, the more profitable it is.
Earnings per Share Formula
|EPS = Net earnings /No. of shares in issue|
Put, EPS is calculated by dividing a company’s net earnings by the number of shares outstanding.
A company with basic earnings of £20 million and 60 million shares in issue will have basic earnings of 20p per share:
£20,000,000 / 60,000,000 shares = 30p per share.
This does not imply that each shareholder would earn 30p per share they own. Instead, EPS can be used to determine a company’s performance or failure based on the EPS measure and whether it has increased or decreased over time.
Why there’s a need to calculate earnings per share?
For investors, calculating earnings per share is crucial because it explains the company’s income on a per-share basis. This makes comparing the company’s results to previous quarters or years a breeze.
The EPS ratio will tell an investor interested in a constant source of income how much space a company has to increase its current dividend.
To make a more rational and wise investment decision, a company’s EPS should always be compared to other firms.
Why the earnings per share changes often?
- Performance over time
It’s critical to comprehend that a company’s earnings per share fluctuate over time. Although a consistently rising EPS suggests healthy growth and a consistently falling EPS could be cause for concern, neither is strictly representative of anything.
- Market Expectations
It’s also crucial to consider whether and to what extent a company’s growth exceeded consumer expectations. Third-party analysts who track the company’s results will make assumptions about its performance. In most cases, the organisation will issue its own forecast. When an organisation exceeds expectations, it is regarded as a positive sign.