Tuesday, 17 January 2012

EPS Ratio Analysis

Earnings per Share (EPS) Defintion:
The earnings per share or EPS is the amount of profit that accrues to each shareholder based on their percentage ownerships or amount of shares owned within the company.

Earnings per Share (EPS) Explained:
The earnings per share ratio is often a good measure of how a company is doing from year to year and is used by many investors in the market. However, companies know that the EPS is often a measure of how they are handling their businesses. This leads several companies to manipulate the earnings per share ratio. The ratio can be manipulated if the company were to buy or sell its own shares in the market, referred to as Treasury Stock. The net income aspect can also be manipulated through the recognition of revenue as well as other ways.

Earnings per Share (EPS) Formula:
The earnings per share equations is as follows:

(Net Income - Preferred Dividends)/Shares Outstanding

Earnings per Share (EPS) Example:
Tim is trying to calculate the EPS for Wawadoo Inc. He was given the following information to solve the problem.

Operating Income - $350,000
Interest expense - $20,000
Tax rate - 34%
Shares outstanding - 100,000 common (no preferred)

Tim will make the EPS calculation as follows:

$350,000 - (350,000 * .34) - $20,000 = $211,000 = Net Income

$211,000/100,000 = $2.11/share = EPS


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