Earning Per Share

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1) Explain to an inexperienced investor the significance of basic EPS and diluted EPS. The significance of basic EPS and diluted EPS are as follows: i) EPS measures the profitability of the company. Earning per share is to reports how much profit is earned for each share of common stock outstanding. The calculation of EPS can involve many detail and intricacies, but in its basic form, it is computed by dividing and net income by the average number of common shares. Most company report EPS on the income statement immediately below Net Income or the notes to the financial statement. ii) EPS can be easily compare results over time. For example, in the first quarter of the year, the company earned net income of $ 3.5 million, compared to $ 3 million for the same quarter in the previous year. It is hard to know whether the increase is good for stockholders, because it is possible that the increase in net income was accompanied by an increase in the number of shares outstanding. By considering earnings on a per-share basic, they adjust for the effect of additional stock issue, resulting in a clearer figure of what increases mean for each investor. The increase in net income from $ 3 million to $ 3.5 million actually does not translate the growth of EPS. Hence, it gives view of comparative earnings of companies. iii) EPS is the key driver of share prices. It may be used to determine the market prices of shares. This is because the price earning ratio that is commonly used to determine the market price requires EPS in the calculation. Shareholders or even potential shareholders may use EPS to determine the market price of shares or the differences between the price and earnings. iv) EPS consideration of present value of stocks based on future expectations. EPS is so popular when dividends and stock price ultimately determine the

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