EPS tells you how much is each stock’s share in the profits made by a company.
Net Profit / Total number of outstanding shares is the formula EPS. Net Profit is Revenue (or Sales) – Expenses (Including Tax & Interest). Net Profit is also called PAT. EPS share is what each share could get if the profit was divided.
Basic vs Diluted EPS
What we have discussed above is Basic EPS. It is simple division of Net profit by outstanding shares. Diluted EPS takes convertible securities into account to calculate earnings per share. Convertible securities include convertible preferred shares, employee stock options, debt, equity etc.
In simple terms, the basic difference between basic EPS and diluted EPS is that in diluted EPS it is assumed that all the convertible securities will be exercised.
Example of EPS
Basic EPS of Dabur India Ltd of last 12 months which is called EPS of trailing 12 months is Rs. 6.09 (TTM – Trailing Twelve Months here is as per profits declared of last 4 quarters).
Significance of EPS (Earning Per Share)
For an investor looking for steady income, EPS tells you room available for increase in dividends. Higher EPS means more profit or earnings per share and hence a company with higher EPS would be preferred. EPS is used majorly for comparison of two companies. At the same time you can’t compare the EPS of companies functioning in different industries.
The other significance of EPS is that it helps you calculate What is PE Ratio that is Price to earnings per share ratio. PE ratio is Price divided by earnings ratio where Price is the stock market price of the share and the earnings here is EPS.
What is PE Ratio helps you decide whether it worth buying the share or no.