What is earnings per share?

 

Publicly-owned companies must report earnings per share (EPS) below their net income line. This is generally dictated by accepted accounting practices (GAAP). EPS gives investors a way of determining the amount of earnings on its equity investments. In other words, EPS tells investors how much net income the business has earned for each share they own. It is calculated by dividing net income by total capital stock. It is important for shareholders who want to communicate to them a portion of the net income of the business so that it can be compared to the market price of their shares.

Private businesses do not need to report EPS, as shareholders focus on the total net income of the business.

In the absence of what is known as a simple capital structure, publicly-owned companies actually report two EPS figures. Most publicly traded companies have complex capital structures and must report two EPS figures. One is called basic EPS; The other is called diluted EPS. The initial EPS is based on the number of shares outstanding. Diluted earnings are based on the number of shares outstanding and the number of shares that may be issued in the form of options in the future.

Obviously this is a complicated process. An accountant needs to adjust the EPS formula for any events or changes in the business. A business may issue spare parts during the year and repurchase some of its own shares. Or it can issue multiple segments, thereby dividing net income into two or more pools – one pool per share. The merger, acquisition or distribution will also affect the formula for EPS.