EPS is an acronym for Earnings Per Share. Stock markets such as the NYSE and NASDAQ have thousands of publicly traded companies. Investors such as Institutions, Banks, Mutual Funds and Individuals invest in these companies by purchasing shares in these companies. A share can be explained as a unit of ownership. Public companies raise capital for their businesses by issuing shares. The earnings of these companies are a key statistic that every investor and owner wants to know. Since there are a large number of companies in a wide spectrum of industries, investors need a common measure to understand the earnings in the companies in which they invest. Enter EPS.
Earnings per share is the profit that a company has generated in a given period, usually annually, distributed among all the shares that are issued. Let’s illustrate this with a simple example. Assume that company X earned $5 million in 2007. Also assume that the company has issued and outstanding one million shares. Divide $5 million by 1 million shares to arrive at earnings per share of $5. The numerator is the income available to distribute to shareholders. This is equal to net income minus dividends paid to preferred stockholders. Some corporations issue preferred stock that requires the payment of a fixed amount of dividends each year. Also, technically speaking, the number of shares could be a weighted average as companies issue stock options etc. Sometimes corporations also issue convertible securities. Advise all investors of the possible dilution if all stock options are exercised and/or convertible securities are converted.
However, expectations of this statistic should be tempered by its limitations. Comparisons of this statistic must be made by industry, business size, years in business, and many other comparisons. These statistics, both basic and diluted, must be reported in the income statement of public corporations. This indicates its importance.
