Earnings Per Share (EPS) – Meaning, Types, Importance & Limitations (2024)

FAQs

Earnings Per Share (EPS) – Meaning, Types, Importance & Limitations? ›

EPS indicates the company's profitability by showing how much money a business makes for each share of its stock. The EPS figure is determined by dividing the company's net profit by its outstanding shares of common stock. However, it is considered the higher the EPS number, the more profitable the company.

The EPS formula divides the company's net income after tax by the total number of outstanding shares. A major limitation of EPS is that it can create a false perception of the company's profits. EPS works best when compared against companies in the same industry or competitor metrics across a period.

Key Takeaways. Earnings per share (EPS) is a company's net income subtracted by preferred dividends and then divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.

Type of Earnings Per Share

There are two different types of earnings per share: Basic and Diluted EPS. Basic is a calculation that uses the net income of a company divided by the total number of outstanding shares.

Significance of Earnings Per Share

EPS helps investors understand whether investing in a particular company is profitable. A consistent EPS growth may indicate the company's profitability, suggesting its ability to pay higher dividends over time.

There's no definition of a “good” or “bad” EPS value. But all other things being equal, the higher a company's EPS is, the better. The opposite is true for a company's price-to-earnings (P/E) ratio. In most cases, the lower a company's P/E ratio is, the better.

There is no hard and fast number to define a good EPS across companies. Since so many factors go into a company's net income and stock price, variables always exist from one company to the next. To determine whether a company's EPS is "good," it's essential to consider the company's earnings per share in context.

The Employer Payment Summary (EPS) is one of the submissions you complete as part of Real Time Information (RTI). It's needed if no employees were paid in the reporting period, or if you want to claim any payments or reclaim deductions such as your employment allowance.

What is EPS and its benefits? ›

The Employee Pension Scheme (EPS) intends to benefit employees post their retirement. The EPFO manages the administration and assists employees who have reached 58 years of age to obtain a pension. The EPS benefits stand available for both new and existing EPF members.

The basic earnings per share (EPS) metric refers to the total amount of net income that a company generates for each common share outstanding. The basic EPS is calculated by dividing a company's net income by the weighted average of common shares outstanding.

The primary factors that affect earnings per share is a company's earnings or income and the number of common shares outstanding. If the number of shares remains constant, an increase in income would increase EPS, whereas a decrease in income would cause a decrease in EPS.

EPS indicates the company's profitability by showing how much money a business makes for each share of its stock. The EPS figure is determined by dividing the company's net profit by its outstanding shares of common stock. However, it is considered the higher the EPS number, the more profitable the company.

Earnings Per Share Formula Example

ABC Ltd has a net income of $1 million in the third quarter. The company announces dividends of $250,000. Total shares outstanding is at 11,000,000. Since every share receives an equal slice of the pie of net income, they would each receive $0.068.

If the EPS are induced by an antipsychotic, EPS may be reduced by decreasing the dose of the antipsychotic or by switching from a typical antipsychotic to an (or to a different) atypical antipsychotic, such as aripiprazole, ziprasidone, quetiapine, olanzapine, risperidone, or clozapine.

Limitations of EPS include: EPS Manipulation: Companies can manipulate their EPS by increasing or decreasing the number of common shares outstanding. For example, a company can increase its EPS through stock buybacks or reduce its EPS by issuing additional shares or splitting stocks.

One falling of EPS dilution is that it does not consider dilutive effect stock options. Many companies tend to exclude stock options in a company's diluted EPS calculation. Another disadvantage of Diluted EPS calculation is that it does not capture the impact of dilutive securities on a company's cash flow.

Investors use EPS to gauge a company's profitability and potential returns. High EPS suggests good profit-making potential and efficient use of investor funds. To calculate EPS, subtract preferred dividends from net income, then divide by outstanding shares. Net income is what's left after deducting all expenses.

The P/E ratio can help us determine, from a valuation perspective, which of the two is cheaper. If the sector's average P/E is 15, Stock A has a P/E = 15 and Stock B has a P/E = 30, stock A is cheaper despite having a higher absolute price than Stock B because you pay less for every $1 of current earnings.