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What is earnings per share?
Earnings per share (EPS) is a figure describing a public company’s profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company’s quarterly or annual net income and dividing by the number of its shares of stock outstanding. EPS is a basic yardstick of a company’s profitability and is used to tell investors whether the company is a safe bet.
Earnings per share is one of the most important variables for determining a company’s share prices. A high EPS indicates that the company is more profitable and has more profits to distribute to shareholders.
Calculating a company’s basic EPS is simple. If a company has 1,000 shares and earns $10,000, its earnings per share is $10/share. If a company is paying dividends, they’re subtracted from the net income or profit before calculation.
There’s another way of calculating EPS called diluted earnings per share, which includes the value of convertible bonds and stock options if they were converted to stock in the number of outstanding shares. Calculations of diluted EPS factor in the effects of any action that causes more stock to be issued, but what actions are factored in varies depending on the accounting standard used.
Earnings per share is also major component in the price-to-earnings ratio calculation for valuing a company, which measures a company’s value as a factor of its current share price relative to its EPS.
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Earnings per share example
Happy Trader Co. is a small company with no preferred shareholders, 10,000 outstanding common shares outstanding and a net income of $100,000 per year. That means its earnings per share is $10. If the company distributes all of its income to shareholders, each share receives $10. The company decides to sell some of its shares as preferred stock, which pay dividends. Now the EPS lowers a little to reflect the amount they pay in dividends out of their net income.