Companies exit to make ‘Profits’ and
distribute them to their shareholders, by way of ‘Dividends’ and ‘Capital
Appreciation’, created out of retained earnings. Corporations draw up and
present accounts after the end of every financial year, after getting duly
audited, in the annual general body meeting of shareholders. The audited financial statements also
disclose the ‘Earnings Per Share’ or EPS. Is not the profit and loss statement,
which along with the schedules and notes following it, just suffice? What is
the need to compute and report the EPS?
Before we go into what is EPS, its
significance, how it is computed etcetera, we must be clear in our minds that
the corporation and its owners, the shareholders are distinct, with their own
needs and interests. While the annual
financial statements, comprising the statement of profit and loss, assets and
liabilities and cash flows, help the owners assess the performance of the
company, they are inadequate to answer the nagging question in the minds of
members, “What does it mean to me, personally?”
The statement of profit and loss focuses
on the company’s perspective; what the company earned, while EPS focuses on
what the shareholder earned. EPS is
profits of the company reduced to the individual share. An investor can deduce what she earned simply
by multiplying the EPS with the number of shares she owns; conversely, you get
EPS by dividing the profits after tax by the total number of equity shares of
the company. Lets consider the following example:
ABC Corporation’s results stood as
follows: profit before depreciation, interest and tax Rs.1,000,000;
depreciation 10,000; interest 5250; corporate income tax 344,600; total number
of equity shares 100,000 of Rs.10 each.
The EPS is computed as follows:
|
|
Indian Rs.
|
|
Profit before depreciation, interest
and tax
|
1,000,000
|
|
Less:
|
|
|
Depreciation
|
10,000
|
|
Interest
|
5,250
|
|
Corporate Income Tax
|
344,600
|
|
Net
Profit After Tax
|
640,150
|
|
Total number of equity shares
|
100,000
|
|
Earnings Per Share (EPS)
|
6.40
|
Suppose an individual investor own 1000
shares in ABC Corporation, the company earned for her, 1000 x Rs.6.40 =
Rs.6,400.
Earnings Per Share or EPS is an important
component in calculating the ‘Price to Earnings’ or PE ratio, which in turn is
a key tool in value investing.
