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What is earnings per share?

Earnings Per Share (EPS) is an indicator of the profitability and performance of a company that allows stakeholders, analysts, and investors to make informed investment decisions. EPS can be used to compare the performance of different companies in the same industry sector. A higher value of EPS, meaning Earnings Per Share, is more desirable since it indicates that the company is generating higher profits relative to its outstanding shares.

What are the different types of EPS?

Basic EPS: This calculates the earnings per outstanding share of common stock without taking into consideration the impact of dilutive securities such as stock options.

Diluted EPS: It considers the potential dilution of outstanding shares from convertible securities, stock options, or warrants.

Trailing EPS: It provides a retrospective view of the company's profitability by showing its historical earnings over the past twelve months.

Forwards EPS: It estimates the company's future EPS based on analyst forecasts, management guidance, and market trends.

How to calculate earnings per share?

Now that you know what is EPS and the types of EPS, you may be wondering how to calculate it. Here’s the EPS formula:

Earnings Per Share = (Net Income – Preferred Dividends) / Average Outstanding Shares

Factors that affect earnings per share

Here are 4 factors that may influence EPS:

Revenue growth: ‘What is Earnings Per Share?’ It is the measure of the profitability of a company on a per-share basis. Therefore, anything that increases the income and decreases the expenditure of a company is likely to positively affect EPS.

Share buybacks and dividends: Earnings per Share, by definition, represents the profitability of a company which explains why share buybacks and dividend distribution affect the value of EPS.

Macroeconomic factors: GDP growth, interest rate movements and inflation affect corporate earnings, further affecting the EPS of companies.

Cost management: Better cost management equals potentially improved profit margins and, as a result, higher EPS.

Earnings per share meaning should not be taken in the literal sense since the calculated value is merely a fundamental metric to gauge a company’s profitability and performance. EPS, by definition, reflects a company’s ability to generate profits compared to its outstanding shares. It provides insights into the financial health and performance of a company. A higher EPS encourages more investments and shapes market sentiments.

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