Wednesday, 11 August 2010

Earnings Per Share (E.P.S) To Determine The Profitability Of A Share

E.P.S or Earnings Per Share is an important term in Stock Trading. When we analyze the value and profitability of a stock E.P.S is one of the most important factors which may influence our decision. It is the fraction of profit of one unit of share. In United States, The Financial Accounting Standards Board (FASB) instructed that the EPS of each of the major categories to be reported with the income statement. So EPS is an important factor to determine the profitability of a company.

Let us see how can be calculate the EPS of a Company. Simply we can say that it is the Net profit of the company divided by the number of shares. But the net profit in the income and expenditure account should be reduced by the amount of dividend allocated to Preference shares. So we can say

E.P.S = (Net Profit – Dividend to Preference shares) divided by No of equity shares

The No of equity shares are also may vary in time to time. For example the equity shares may 100000 at the beginning of the financial year and it is increased by another 50000 after six months. So we have to consider the weighted average of the equity shares.

100000 x 12 + 50000 x 6
12


That is 125000


If the Net profit of the company for the financial year is $ 1200000 and the dividend for preference share is $ 200000

The EPS


(12,00000 – 200000)
125000


= $ 8


The market value of shares also influenced by EPS of shares, but the EPS itself is not a reliable factor to determine the profitability of shares. Intrinsic value and so many other factors also connected with it. If the Share capital of two companies are $ 100000 and $ 1000000 and the number of shares are 10000. The EPS under this calculation may be same for a given net profit. But the first company is more capable than the second one even if the EPS is same. So I strongly recommend that consider all other factors also when you analyze the profitability of a share.

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