WHAT IS EARNINGS PER SHARE (EPS)?
An important financial measure which represents the profitability of a company, is earnings per share (EPS). Earnings per share is the fragment of a company’s total profit associated with each stock. EPS is used as a tool by the investors to track the profitability of a company before buying its stocks. The higher is the value, better is the profitability.
Earnings per share is the result of difference between net income and preferred dividends divided by number of outstanding shares. To calculate this value the balance sheet and income statement of a company is used to find all the values related to the formula. It is better to use weighted average number of stocks, as the number of stocks keeps changing daily. Any stock dividend or splits must be addressed to in the calculation.
DIFFERENCE BETWEEN BASIC EPS AND DILUTED EPS:
The formula given above is used for calculating basic EPS. It does not feature the dilution of stocks, issued by the company. When the capital structure of a company constitutes of items such as stock options, warrants, restricted stock units, etc, then they increase the total number of shares present in the market. It is due to this reason the companies present diluted EPS, which presumes that all shares which could be traded are issued.
For example, the total number of shares issued by Ford in fiscal year 2018 was 38 million. When this number is added to its total outstanding shares, the diluted weighted average shares equal a total of 500 million + 38 million = 538 million. The company’s diluted EPS therefore is $3.05 billion divided by 538 million, equals to $5.67.
The adjustment of numerator and denominator is very important while calculating a fully diluted EPS. When a lender provides loan, with the provision of converting loan into shares under certain conditions. The shares created in this circumstance will be included in the denominator. But, if this happens it means the company has not paid the loan amount, so this amount will be added to the numerator. Thus, the result not being distorted.
IMPORTANCE OF EPS FOR THE INVESTORS:
Earnings per share is one of the most important parameter used, for determining a share’s price. It is instrumental in calculating the P/E ratio of a stock, here P refers to the price and E refers to the earnings per share. By doing this division, an investor can analyse a proper value of stock in terms of amount paid by the market for each dollar of earnings.
Earnings per share is one among the many reliable fundamental indicators used for choosing proper stocks. If you are interested in investing or trading in stock market, it is very important to have a good stock broker. It provides the platform to compare two stocks. The value of this parameter is also important because not all the investors have access to the accurate earnings of a company, but they can check out this value on stock exchange’s website.
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