• HDFC securities
• 22 Feb 2023
• Knowledge Centre

 

As an investor, there are several parameters and metrics that one might look at before making an investing decision. These key figures can be crucial in identifying the financial health of a company. Although there are several different parameters and methods to approach investing, knowing the earnings per share (EPS) can be very helpful to an investor.

EPS in share market stands for Earnings Per  Share . This figure is an indicator of how profitable a company is and can help investors compare peers and measure a company’s financial health.

EPS can also be understood as the amount of profit that each individual share earns. If a company’s EPS is high, it indicates high profitability. It shows the per-share profitability of the company, which is how much profit a company makes for each share.

Formula of EPS

In order to calculate a company’s EPS, the following formula can be used.

EPS = (Net Income – Preferred Dividends) / End-of-Period Common Shares Outstanding

For calculating the EPS of a company, one needs to subtract the preferred dividends from the net income of the company and divide that amount by the number of outstanding shares at the end of a period.

For instance, if a company has a total of 1 lakh outstanding shares while the net income is Rs 5 lakh and preferred dividends are Rs 2 lakh.

Then, the EPS of the company would be (500000-200000)/100000. This would give an EPS of 3.

An EPS of 3 indicates that the company generated a profit of Rs 3 per share.

 

Importance

Apart from knowing what is EPS in stock market, investors should also be aware of the importance of EPS. Check out the significance of EPS:

• EPS is a very helpful financial parameter for investors in the Stock market to compare different companies while making investing decisions. The EPS of a company can also be compared with the average EPS of a sector to know where the company stands.
• The EPS is also a valuable tool to ascertain if an investment in a company would help an investor generate more returns. Since the EPS is indicative of a company’s profitability, an investor can use it to invest in companies with a higher EPS as it may help them receive more dividends.
• There are several metrics that can be used to analyze the financials of a company. The Price to Earnings ratio (P/E ratio) helps in ascertaining the valuation of a company. The EPS of a company is used as a foundation as it represents the earnings of a company.

The EPS is also indicative of the past performance of a company. An investor can track the historical EPS data of a company in order to see if the company has been growing or not. A company whose EPS grows at a steady rate is often a good sign and investors should look for that while analyzing past data.

Apart from the EPS, there are several other factors that an investor should consider before making an investment decision.