What is it?
Earnings per share, or EPS, is the share of net profit that can be allocated to each outstanding share.
What does it signify?
It is an indicator of the firm’s profit on a per share basis and is used to calculate the price-earnings (P-E) multiple. The P-E multiple, a valuation tool for shares, uses the EPS as the denominator and market price as the numerator.
How is it calculated?
Out of the total net income of the firm, the dividend payout for preference shares is subtracted; the remaining is divided by the number of outstanding shares (it is taken as the average for the whole year). Say, a firm’s net annual income is Rs10 crore and the dividend on preference shares is Rs2 crore. Also, 100,000 shares were outstanding in the first six months and 150,000 in the last six months. So, the average number of outstanding shares is (100,000 + 150,000)/2 = 125,000. The EPS would be Rs8 crore/125,000 = Rs640. Some firms also give fully diluted EPS, which is more conservative as it includes all the convertible warrants, grants and options while calculating total outstanding shares.
Is it enough to know EPS?
It is an important measure of a firm’s profit but one should keep in mind that reported profit can be manipulated, and so profit and EPS shouldn’t be given too much importance. Other measures, such as the amount of cash a firm generates are more important in determining a company’s value.