Earnings Per Share is a very important ratio for the investors and companies alike in order to make investment decisions and used by stock investors to make buy, sell and purchase decisions. Earnings Per Share is a profitability ratio. The numerator of the ratio is made up of earnings of the company. The earnings figure is obtained by using the company’s Profit After Tax (PAT) figure. PAT is obtained by subtracting all the operating expenses, interest expenses, and all the taxes are owed by the company from the revenue or sales figure of the company. The denominator of the ratio uses the number of shares outstanding of a company. These are shares that have been issued to the public using IPOs, right issues, and bonus shares.
This ratio can be large and small depending on the profitability of the company, and the number of shares outstanding. The bigger ratio means that either the earning of the company is very high, or the company has reduced the shares outstanding by either repurchasing the shares, or eliminating them. The lower ratio means that either the company has low profitability or increased the number of shares outstanding by selling more shares, or using the option of stock splits.
This ratio can be used to determine the earnings of the company as compared to the shares that are outstanding. The other use of this ratio is by the stock market investors as this ratio is used in Price Earnings Ratio that is used by the stock market investors to price the shares of the company. This helps the company and investors to make the correct decision about the company, and its common stock. (Wachowicz and Van Horne, 2008)
References
Van Horne, J., & Wachowicz, J. (2008). Fundamentals of financial management. Harlow, England: Financial Times/Prentice Hall.
