Beginning Investment Terms – Earnings per Share (EPS)
Posted on | October 21, 2009 | No Comments
Earnings per share is a pretty self revelatory term. It is the net earnings of a company divided by the number of outstanding shares for a given time, usually a year, or a quarter. EPS= Net Income/shares outstanding. There are various ways of calculating this. If you go to the Income statement you will find the line item Net Income, which is your numerator. For smaller companies the number of shares can be as simple as the total shares at end of the period you are measuring. For a larger company or one whose number of shares changes during the measured period, a more accurate way is to use a weighted average of shares for the period.
For companies where warrants or convertible shares or options are relevant then a better tool is to use the diluted earnings per share which includes all these types of potential shares in the number of shares outstanding. Thus the diluted earnings per share is usually lower than EPS.
Earnings per share are a part of the equation for Price Earnings (P/E) and are thus one of the most important aspects of understanding, broadly speaking, the relative value of a company (to some investors).
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