Full Form of EPS

Full Form of EPS – Earnings Per Share

The  Full Form of EPS stands for Earnings Per Share. EPS is defined as the ratio of net income to the total number of ordinary shares issued by the company.  This is the ratio that generally indicates the profitability of the business.

Objective

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For eg:
Source: Full Form of EPS (wallstreetmojo.com)

Formula to Calculate EPS

The eps can be determined as per the relationship described below: –

Earnings Per Share = Net Income / Total Number of Shares Outstanding

Earnings Per Share = (Net Income – Preferred Dividends – Extra-ordinary Items) / Total Number of Shares Outstanding.

Types of EPS

There are two broad types of EPS classified as the basic EPSBasic EPSBasic EPS represents the income of the company for each common stock. In other words, it is the value appreciation of the common shares resulting from equal distribution of the company's profit as dividends among the common stockholders.read more and diluted EPSDiluted EPSDiluted EPS is a financial ratio to check the quality of the Earnings per Share after taking into account the exercise of Convertible Securities like Preference Shares, Stock Option, Warrants, Convertible Debentures etc.read more.

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For eg:
Source: Full Form of EPS (wallstreetmojo.com)

#1 – Basic EPS

  • The basic eps only focuses on the total number of common outstanding shares.
  • The basic eps do not account for any stock dilutions or conversion.

#2 – Diluted EPS

Examples of EPS

Below are the examples of earnings per share –

Example #1

Let us take the example of company ABC. During the year, the company generates a net income of $50,000,000. The company, as on date, has issued 5,000,000 shares. Help the management determine the earnings per share.

Solution

Calculation of earnings per share is as follows,

EPS Example 1
  • = $50,000,000 / 5,000,000
  • EPS =$10.

Therefore, the business has eps of $10.

Example #2

Let us take the example of company XYZ. During the year, the company generates a net income of $25,000,000. The company, as on date, has issued 2,000,000 shares. After the event of dilution, the business now has 2,500,000 outstanding. Help the management determine the basic and diluted earnings per share.

Solution

Calculation of earnings per share is as follows,

EPS Example 2
  • = $25,000,000 / 2,000,000
  • Earnings Per Share =$12.5

Calculation of earnings per share is as follows,

EPS Example 3
  • = $25,000,000 / 2,500,000
  • EPS =$10

Therefore, the business has the basic earnings per share of $12.5 and diluted earnings per share of $10.

Differences Between Earnings and Dividends Per Share

  • The dividend per share is defined as the ratio of the dividend paid to the stockholders to the total number of common shares.
  • However, it takes into account the net income.
  • Industry uses both metrics to analyze the profitability of the business.
  • However, in the case of dividend per share, dividends are payable to the stakeholders from the portion of the net income.

Importance

The earnings per share is an important metric for investment analysis as it helps in a comprehensive analysis and evaluation of the investment. However, since the metric is open for manipulation, it is advisable that investors should not absolutely rely on this metric alone. They should supplement it with additional metrics that help in the investment evaluation.

Benefits

Earnings per share convey how much residual incomeResidual IncomeResidual income refers to the net earnings an organization possess after paying off the cost of capital. It is acquired by deducting the equity charges from the company's net profit or income.read more or earning each shareholder is liable to get.

Limitations

Conclusion

The earnings per share are the ratio that financial analysts and investors use in investment analysis and profitability analysis.  It helps in letting each investor know how much he is liable to get from the business in the form of earnings. It is normally computed as the ratio of net income to the total number of issued common shares.

Recommended Articles

This has been a guide to the Full Form of EPS, i.e., Earnings Per Share and its definition. Here we discuss the formula to calculate EPS along with examples, benefits, limitations, and differences. You may refer to the following articles to learn more about finance –