Earnings per share (EPS)
The term earnings per share, or EPS, is used for the returns gained from an investment. A company’s EPS is declared once every quarter. To determine a company’s EPS, one simply has to divide the amount of profit by the weighted average of outstanding shares. However, other more specific formulas may be used, depending on the type of information or category required. For instance, computation of EPS based on net income is different from the computation used for other categories. Companies are expected to come up with quarterly reports to declare their EPS for all categories.
In addition, to make sure that the figures actually make sense, it is important to distinguish between basic earnings per share and diluted earnings per share. Basic EPS, as its name suggests, gives us an idea of the amount of profit allocated per share. While this figure is used for valuation purposes when determining the earnings multiplier or P/E ratio, it may not necessarily provide an accurate picture of the real score on the company’s earnings per share.
This is where diluted EPS comes in. This figure factors in other important factors, thereby making it a more reliable figure. It takes into account the very real possibility that the company may exercise available stock options, convertible bonds, and other similar options. When a company decides to add more shares to those currently outstanding, this dilutes the value of all shares, thus bringing down actual earnings for every share. As such, the figure for diluted EPS may be viewed as the more realistic figure between the two types.