Earning per share (EPS) Definition
Earning per share (EPS) is also known as net income per share. It is the market prospect ratio which use to measure the net income amount earned per share of stock outstanding.
At the end of the year when profit distributed to outstanding shares then each share of stock this money.
Earning per share (EPS) used to calculate the company that how much a company profitable on a shareholder basis.
SO from this ratio larger profit per share of the company can be compared with a smaller profit per share of the company from which we now that how many shares are outstanding in the company.
Earning Per Share (EPS) or basic earning per share formula can be calculated by subtracting the preferred dividend from net income and then dividing it by weighted average common share outstanding.
Earning per share = (Net income – Preferred dividend)/Weighted average common share outstanding
From the formula, it is clear that the preferred dividend removes from net income for calculating the earning per share. EPS use to calculate the income available to the common stockholders.
Preferred dividend only for the preferred shareholder not for the common shareholder.
Mostly EPS ratio used at the end of the year for the calculation of the financial statement.
Weighted average common share can be calculated by the sum of beginning and ending outstanding shares and divided by 2.
As compare to low earning per share (EPS) high EPS is better. Because high EPS shows that the company is a more profitable company and for the shareholder, it has more profit to distribute.
Many investors do not consider the EPS important because it only increases the stock price of the company. So for making the decision of investment investor ignore this ratio.
Now we take the example of a small company which has net income of 50,000 dollars during a year. This company has no preferred share outstanding.
During the year weighted average share outstanding of the company is 5,000 dollars. EPS of this company can be calculated as
$10=($50,000 – $0)/$10,000
EPS for this company is 10 dollars which means that if this company distribute the income to its shareholders then every share receive the 10 dollars.
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