EPS is an acronym for Earnings Per Share. Stock markets like the NYSE and NASDAQ have thousands of publicly traded companies. Investors such as Institutions, Banks, Mutual Funds and Individuals invest in these companies by purchasing shares in these companies. A share can be explained as a unit of property. Public companies raise capital for their businesses by issuing shares. The earnings of these companies are a key statistic that every investor and owner wants to know. Since there are a large number of companies in a wide spectrum of industries, investors need a common measure to understand earnings in the companies they invest in. Enter EPS.
Earnings per share is the profit generated by a company in a given period, usually annually, distributed among all the shares that are issued. Let us illustrate this with a simple example. Assume that Company X earned $5 million in 2007. Assume also that the company has issued and outstanding one million shares of stock. Divide $5 million by 1 million shares to arrive at an earnings per share of $5. The numerator is the income available to distribute to shareholders. This is equal to net income minus dividends paid to preferred shareholders. Some corporations issue preferred stock that requires the payment of a fixed amount of dividends each year. Also, technically speaking, the number of shares could be a weighted average since companies issue stock options, etc. Sometimes corporations also issue convertible securities. Advise all investors of possible dilution if all stock options are exercised and/or convertible securities are converted.
However, expectations from this statistic should be tempered by its limitations. Comparisons of this statistic should be made by industry, size of business, years in business, and many other comparisons. This statistic, both basic and diluted, must be reported in the income statement of public corporations. This indicates its importance.