Earnings Per Share (EPS) - Formula

EPS Formula:

EPS Formula

Definition:

Earnings Per Share (EPS) means the 'Net Profit' or 'Profit After Tax (PAT)' of a company reduced or converted to a single share.

Significance:

EPS is the important, denominator component in calculating Price to Earnings Ratio.

Example:

Let us consider the example of the EPS of SJVN Ltd., a company listed on Indian stock exchanges, for the financial year ending on 31st March 2015.

Example Calculation of EPS of SJVN Ltd.

Related Links:

• How to Calculate 'Earnings Per Share' or 'EPS'?
• Price to Earnings Ratio Slide
• How to Find The Fair Price of A Stock?
•  What is 'Price to Earnings Ratio'? - Presentation
• How to Calculate ‘Price to Earnings Ratio?
• Earnings Per Share (EPS) - Definition

Earnings Per Share Slide

EPS Example Based on SJVN Ltd.

Earnings Per Share (EPS) - Definition

Definition:

"Earnings Per Share (EPS) means the 'Net Profit' or 'Profit After Tax (PAT)' of a company reduced or converted to a single share.

Formula:

Example:

Let us consider the example of the EPS of SJVN Ltd., a company listed on Indian stock exchanges, for the financial year ending on 31st March, 2015.

Further Reading:

• How to Calculate 'Earnings Per Share' or 'EPS'?
• Price to Earnings Ratio Slide
• How to Find The Fair Price of A Stock?
•  What is 'Price to Earnings Ratio'? - Presentation
• How to Calculate ‘Price to Earnings Ratio?
• Earnings Per Share (EPS) - Formula

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	12,356.41
Total Expenses	4,740.29
Operating Profits	7,616.12
Non Operating Revenues	2,265.40
Profit Before Exceptional Items	9,881.52
Exceptional Items	113.01
Corporate Income Tax	3,346.21
Miscellaneous Charges	0.44
Profit for the year	6,421.86

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	6,421.86
Number of Equity Shares ( In crores (10 millions) of nominal valye of Rs.1	396.47
Earnings Per Share – Rs. Per share	16.20

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.

What is Earnings Per Share (EPS)?

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.