‘Earnings per share’ is the ratio which stands for the company net income which is available to be paid to the shareholders. A company having the high value of earnings per share is capable of dividing the high amount of shares among the investors. It may also allow the earnings to be re-used for the growth of a business enterprise.
If some investor wants to invest in a company, he might be interested in knowing the earnings per share ratio. This ratio gives the information regarding the division of share per person. Some companies may not be using this ratio to be paid to the shareholders. They may like the money to be used in the business settings for its various tasks.
If one wants to know about the growth of some business, it is good to look at their earnings per share ratio. If it is on a constant rise, it means that the specific business is making an adequate growth. A negative trend may give a clue to the investors that the company is going towards a downfall.
Calculation of Earnings per share (EPS) Ratio:
It is calculated by subtracting the ‘dividend payments’ from the ‘net income’. This is then divided by the ‘number of common shares’:
For example: if a business has a net income of $2,000,000. The dividend share is $500,000. The company sold its own stock also during that specific period. The average amount of these common shares comes out to be $700,000. The earnings per ratio of that company are
$2,000,000-$500,000/ $700,000 = $2.14 per share.
In other words, it is calculated by dividing the number of ‘outstanding shares’ from the total income. For example, a company has a net income of $11 million and it has paid $1million to the preferred stockholders. The amount would be $10 million in total earnings. A number of outstanding shares are $20 million. The EPS = $0.5
‘Earnings per share’ ratio is considered as a very important value in the determination of the shares price. An important thing to notice here is that two companies can produce the same earnings per share ratio.
One would be doing with a less investment. This second company would be using efficiently its capital to produce the income. Among the two companies with a same earning per share ratio, the second company would be termed as a much better company in comparison to the first.
It can be divided into the following further types:
This is also known as reported EPS. This is based on GAAP. GAAP attends for ‘Generally Accepted Accounting Principal’. It is an important entity on financial statements which is to be submitted to the regulatory authorities.
Pro forma EPS:
This is a type of EPS in which the company is using the assumptions for a number of acquisitions, expenses or income. The name is derived from a Latin word which means “as a matter of form”
It is calculated from ongoing income. This is a normalized NI which removes the unusual items. For example, a ‘gain’ that is earned one time is ignored because transactions like these do not form the part of main operations of the company.
As it is clear from the name headline ‘earning per ratio’ is the amount that the company tells the media. These values are shared by various business channels on television.
Cash earnings per ratio are the amount calculated by estimating the amount of ‘outstanding diluted shares’ of a company. The ‘outstanding diluted shares’ amount is then divided by the amount of ‘operating cash flows’. This value gives a better estimate of the financial status of the company because to manipulate this amount is not an easy task.