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Earnings Per Share (EPS)

Earnings per Share Assignment / Homework Help

Shareholders are concerned with the earnings of the firm in two ways. One is the availability of funds to pay their dividends and other to expand their interest in the firm with the retained earnings. These earnings are expressed on a per share basis which is in short called Earnings per share (EPS). EPS is calculated by dividing the net income by the number of shares outstanding.

Net Income Preference Dividends
   Number of Outstanding Shares

Generally, weighted average number of shares outstanding is considered in the denominator for computation purposes as the number of shares outstanding can change over a period of time.

The EPS measure can be used to draw conclusions on the basis of its trends over a period of time, comparison with the EPS of other firms and comparison with industry average. One of the advantages of the EPS is that it is easy to compute and understand. It is also solely dependent on the performance of the company and is not affected by market sentiments. Among the disadvantages, it refers to the past performance of the company and does not tell about the current or future performance. To overcome this, one can compute the "current EPS" (EPS for the current year) and "forward EPS" (for the coming year). However, these numbers are only projections and not actual.

EPS can also be Basic EPS or Diluted EPS. Diluted EPS takes into account the outstanding shares as well as all securities like stock options, warrants, convertible bonds etc, which can be converted into shares in future.

Example:

A company earned a net income of $757,326. It has 250,000 common shares outstanding at the end of the period. The EPS is:

$757,326
250,000

$3.03


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