Earnings Per Share (EPS)
Understanding Earnings Per Share (EPS): Measuring Profitability Per Share
Earnings Per Share (EPS) is a financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock. It is a key indicator of a company's profitability and is often used by investors to gauge a company's financial health and performance.
EPS = (Net Income−Dividends on Preferred Stock) / Average Outstanding Shares
Suppose Company XYZ has the following financial details:
Net Income: $1,000,000
Dividends on Preferred Stock: $100,000
Average Outstanding Shares: 450,000
To calculate the Earnings Per Share:
Subtract dividends on preferred stock from net income: 1,000,000−100,000=900,000
Divide by the average outstanding shares: 900,000/450,000=2
An EPS of $2 indicates that Company XYZ earned $2 for each share of its common stock over the reporting period. This suggests the company's profitability on a per-share basis.
Market Value Ratio