Concepts of EPS

Slide 1: Earnings per share or EPS is an important financial measure. Earnings per share (EPS)
is the portion of a company's profit allocated to each share of common stock. It indicates the
profitability of a company. It is calculated by dividing the company’s net income with its total
number of outstanding shares. It is a tool that market participants use frequently to measure the
profitability of a company before buying its shares. The higher the earnings per share of a
company, the better are its profitability. While calculating the EPS, it is advisable to use the
weighted ratio, as the number of shares outstanding can change over time.

The higher the EPS is, the more money our shares of stock will be worth because investors are
willing to pay more for higher profits. Pass: Give EPS a passing score if the EPS are increasing.

Slide 2: Earnings per share can be calculated in the following way:

We will need the net income and preferred stock dividends (It is accrue and paid on a company's
preferred shares) from the income statement, as well as the number of common shares
outstanding, which can be found in the stockholders' equity section of the balance sheet.

First, subtract the preferred dividends paid from the net income. This will tell us the total
earnings available to common shareholders.

Net Income- Preferred Dividends= Total Earnings

Next, we have to divide the earnings total by the number of outstanding shares listed on the
balance sheet. This will give the EPS.

EPS= Total Earnings/ Outstanding shares

For example, if a company's net income was ₹ 10 million, and it paid ₹1 million to preferred
shareholders, there would be ₹9 million in earnings available to common shareholders. If the
company had 20 million outstanding shares, the EPS could be calculated as:

EPS= ₹ 9Million / ₹ 20Million = ₹ 0.45

Slide 4: Earnings per share are important to investors because it breaks down a company's profits
on a per-share basis, which is especially useful for tracking performance over long time periods.
Over time, a company's total number of outstanding shares can change significantly, so the total
earnings may not be indicative of higher profitability for shareholders.

For example, if a company earned ₹ 10 million in 2008 and ₹ 20 million in 2018, it may appear
that profitability doubled. However, during that period, if the number of outstanding shares
increased from 10 million to 40 million, we can calculate that earnings per share actually
declined from ₹ 1.00 to ₹ 0.50.

Slide 5: Changes in the EPS growth rate may influence stock prices more than the actual rate of
growth. Acceleration in EPS growth will usually result in a stock price increase. For example: If
company A, which has grown earnings 15 percent annually, suddenly reports a 20 and then a 25
percent increase in EPS, its stock price could shoot up 25 or even 50 percent. Conversely, a
deceleration in a company’s EPS growth can result in a stock price drop.

Slide 6: Conclusion:

For an investor who is primarily interested in a steady source of income, the EPS ratio can tell
him/her the room a company has for increasing its existing dividend. Although, EPS is very
important and crucial tool for investors, it should not be looked at in isolation. EPS of a company
should always be considered in relation to other companies in order to make a more informed
and prudent investment decision.