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
- The broad objective of the EPS is to indicate the profitability of the business.
- The business may report EPS after adjusting extraordinary line items followed by the potential adjustments.
- If the EPS is high then it indicates that the overall profitability of the business has appreciated over time.
Formula to Calculate EPS
The eps can be determined as per the relationship described below: –
- At times EPS could be determined using the weighted average of the outstanding shares.
- This is done to account for the stock splits and stock dividends that happens for the accounting period.
- It could be adjusted for preferred dividends and extraordinary items.
- The formula of EPS that accounts for the preferred dividends and extraordinary items can be expressed as follows: –
Types of EPS
There are two broad types of EPS classified as the basic EPS and diluted EPS.
#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
- The diluted EPS focus on the dilutions arising out of the stock conversions and split that can affect the value of the earnings per share.
- The diluted EPS come into picture when there are stock options and warrants etc.
- The diluted EPS are determined by accounting for warrants, convertibles, and options.
- Whenever options, warrants, and convertibles are exercised, they get deducted from the basic earnings per share.
- After the exercise of options, warrants, and convertibles, the total number of issued shares tends to appreciate thereby reducing the overall earnings per share.
- It is a key metric for that business that has a complex capital structure in place.
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 can be done as follows,
- = $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 can be done as follows,
- = $25,000,000 / 2,000,000
- Earnings Per Share =$12.5
Calculation of earnings per share can be done as follows,
- = $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.
- Both metrics are used to analyze the profitability of the business.
- However, in the case of dividend per share, dividends are paid 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 advised that investor should not absolutely rely on this metric alone and should supplement with additional metrics that help in the investment evaluation.
Benefits
Earnings per share convey how much residual income or earning each shareholder is liable to get.
- It is an important metric used for industry analysis.
- It is also used in the ratio analysis for comparable periods.
Limitations
- It can be distorted or misrepresented if the company pursues any sort of buyback of shares.
- Since the business can exercise its discretion on what they want to report on earnings per share could, therefore, make this metric open for huge manipulation.
- It does not broadly account for financial leverage or lets the investor know the impact of the leverage on the earnings.
Conclusion
The earnings per share are the ratio that is used by financial analysts and investors 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.
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This has been a guide to 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 –
