What Is Earnings Per Share?
Publicly owned corporations must account earnings per share (EPS) below the net revenue line in their income statements. This is mandated by mainly approved accounting methods (GAAP). The EPS gives investors a means of deciding the amount the corporation earned on its stock share investments. Basically, EPS tells investors how much net income the corporation earned for every stock share they own. It’s calculated by dividing net revenue by the total number of capital stock share. It is crucial to the stockholders who want the net revenue of the business to be communicated to them on a per share basis so they can balance it with the market price of their shares.
Private companies don’t have to report EPS as a result of stockholders focus more on the business’s total net revenue.
Publicly-held corporations really report two EPS figures, except when they have what is known as a simple capital structure. Most publicly-held corporations though, have complex capital structures and have to account two EPS figures. One is called the easy EPS; the other is called the diluted EPS. Basic EPS is based on the number of stock shares that are outstanding. Diluted income are based on shares that are outstanding and shares that may be given in the future in the form of stock selection.
Apparently this is a difficult process. An accountant has to adjust the EPS formula for any number of occurrences or revisions in the company. A business might issue extra stock shares during the year and buy back some of its own shares. Or it might issue many classes of stock, which will cause net income to be divided into two or more pools – one pool for each type of stock. A merger, acquisition or divestiture will also impact the formula for EPS.
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