To arrive at Earnings per Share (EPS) pre-tax profits are divided by the amount of shares issued to get a figure for the amount of wealth that's been created per share by the company. As profits are reported on a quarterly basis, the 'latest' EPS will either be from the last quarter or the last financial year. Even though it's net profits that a shareholder will actually benefit from, the net profit figure shouldn't be used for EPS because changes to the tax regime and companies differing treatment of tax will affect data comparisons across time and between shares. So the pre-tax figure is best for comparison.
The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.
In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.
The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.
In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.
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Last Updated: Sep 2009
Last Updated: Sep 2009
What is Earnings per Share EPS?
Diluted EPS expands on the basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio.
An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.
Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio.
An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.
