Sunday, July 24, 2016

How to Calculate 'Earnings Per Share' or 'EPS'?

Contrary to conventional financial statements, profit and loss account, balance sheet and statement of cash flows, which portray the financial picture in the company’s perspective, ‘Earnings Per Share (EPS)’ interprets the same information from the shareholder’s viewpoint. Mostly investors are interested in knowing what the corporation has earned for them, and EPS fulfills this requirement, exactly. In this article, let us examine how EPS is calculated.

Summarized information assembled from the audited financial statements of NMDC Ltd., for the financial year 2014-15 show: Operating revenue 12356.41, total expenses 4740.29, non operating income 2265.40, exceptional items of charge 113.01, corporation tax 396.47 and miscellaneous debits 0.44. All numbers are expressed in Indian Rupees (Rs.) in crores  (10 millions).

On drawing up the profits and loss statement, the results will be as follows:

Rs. In crores (10 millions)
Total Operating Revenues
Total Expenses
Operating Profits
Non Operating Revenues
Profit Before Exceptional Items
Exceptional Items
Corporate Income Tax
Miscellaneous Charges
Profit for the year

The balance sheet and schedule number 2.1 reveals that the company has an equity capital of Rs.396.47 crores of nominal value of Rs.1 each, that is 396.47 crore shares.

Dividing the net profit for the year by total number of equity shares we obtain he ‘Earnings Per Share (EPS)’.

Rs. In crores (10 millions)
Profit for the year

Number of Equity Shares ( In crores (10 millions) of nominal valye of Rs.1

Earnings Per Share – Rs. Per share

Our mathematical labors reveal that NMDC Ltd., had earned for its members Rs.16.20 for every equity share having a face value of Rs.1. On the current market price of the share of Rs.98.10, the EPS amounts to a tax-free return of 16.51%, indeed impressive, considering obtainable interest rate of about 7.50% for bank fixed deposits, which attract a tax rate of about 33%.

Thus, ‘Earnings Per Share’ or ‘EPS’ throws valuable perspective of the returns earned by the investee corporation for its shareholder.