Rosalinda G.

Biolon
BSA-3

EARNINGS PER SHARE (EPS)

Earnings per share (EPS) on common stock computed by dividing net income less

preferred dividends with the number of common shares outstanding, is used to measure the

share of profits that are earned by a share of common stock. It is one of the most important

ways of measuring stocks worth. Earnings per share is inuenced, as for protability, by the

prot but also (like dividends) by the number of shares issued. As for the dividend yield, the

price/earnings (P/E) ratio is often more a result of changes in the share price than in the prots

reected in the earnings per share. Generally accepted accounting principles (GAAP) require

the reporting of earnings per share in the income statement. As a result, earnings per share

(EPS) is often reported in the financial press

Shareholder return decisions made by directors inuence both the dividend per share

and the dividend payout ratio. Dividends are a decision made by directors on the basis of the

proportion of prots they want to distribute and the capital needed to be retained in the business

to fund growth. Often, shareholder value considerations will dictate the level of dividends, which

businesses do not like to reduce on a per share basis. This is sometimes at the cost of retaining

fewer prots and then having to borrow additional funds to support growth strategies. However,

the number of shares issued also affects this ratio, as share issues will result in a lower dividend

per share unless the total dividend is increased. As companies have little inuence over their

share price, which is a result of market expectations as much as past performance, dividend

yield, while inuenced by the dividend paid per share, is more readily inuenced by changes in

the market price of the shares.

 One of the major drawbacks of earnings per share measure is that a company has a lot

of discretion when deciding what is and isnt exceptional so the figures are open to

manipulation. This is because figures used to calculate eps is affected by changes in a

companys accounting policy. Eps growth percentages can be misleading or meaningless when

based on a small base or negative earnings from a prior period. Also eps will be distorted if a

company conducts a share buy-back because when a company repurchases its own shares it

thereby reduces the number of shares in issue, which automatically increases its eps figure.

Eps can be misleading to investors because it take no account of companys debt position and

financial leverage and factors that a discerning investor needs to be aware of.

It is of essence that eps is an important tool in measuring profitability. It may be

advantageous in one side but may be disadvantageous to other side. Investors in making

important decisions must take into account not only those things presented and given but must

also take into considerations those things that may be potentially hidden. Being professionally

skeptic does not bring a man into deep hole but will lead on to catch invisibilities.