EPS, earnings per share or profit per share
Definition: Earnings per share (EPS) is 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. Explanation: EPS is generally considered to be the single most important variable in determining a stock’s price. It is also an important component used to calculate the valuation ratio between price and earnings. For example, suppose a company has net income of $25 million. If the company pays out $1 million in preferred dividends and holds 10 million shares for half the year and 15 million shares for the other half, the earnings per share would be $1.92 (24/12.5). First, $1 million is subtracted from net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10 million + 0.5 x 15 million = 12.5 million). An important aspect of EPS that is often ignored is the capital required to generate the revenue (net income) in the calculation. Two companies could generate the same EPS figure, but one could do so with less equity (investment) – that company would be more efficient at using its capital to generate revenue and would, all else being equal, 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 one financial metric, but to use it in conjunction with statement analysis and other metrics.
About the Vikingen
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