Earnings Per Share Ratio is a type of Profitability Ratio that determines the net profit of the company per equity share wise. This ratio breaks down the net profit of a company to the level of equity shares.
$$Earnings\quad Per\quad Share(EPS)\quad Ratio=$$$$\frac { Net\quad Profit }{ Number\quad of\quad Equity\quad Shares } $$
Where,
$$Earnings\quad Per\quad Share(EPS)\quad Ratio=$$$$\frac { Net\quad Profit }{ Number\quad of\quad Equity\quad Shares } $$
Where,
- Net Profit = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation /Amortization + Interest Expenses + Tax paid)
- And Number of Equity Shares is the total count of common share of a company (excluding Preference Shares)
- Earnings per Share Ratio is in the form of an amount (Rs.) i.e. an EPS of 5 implies earning of Rs. 5 on each common equity.
Significance and Interpretation
- EPS Ratio gives a simple and straight formula for the investors that are concerned only with returns on the company.
- The value of EPS alone cannot be used to compare the return of two companies as the Price of Common Equity may differ from company to company.
Examples
Example 1:
Given below are few details of M/S XYZ Ltd., use them an calculate the EPS Ratio for M/S XYZ Ltd.| Particulars | Amount (in Rs.) |
|---|---|
| Equity Share Capital @ Rs 10.00 each | 5000000.00 |
| EBIT (Earnings Before Interest and Taxes) | 4000000.00 |
| Interest Expenses | 1000000.00 |
| Tax Payable | 500000.00 |
Solution:
Net Profit = EBIT – Interest Expenses – Tax payable
⇨ Rs. 2500000
Total Number of Common Equity = 5000000 / 10
Total Number of Common Equity = 5000000 / 10
⇨ 500000
EPS = Net Profit / Total Number of Common Equity
EPS = Net Profit / Total Number of Common Equity
⇨ 2500000 / 500000
⇨ Rs. 5
Hence, EPS on common Equity of Rs. 10 each = Rs. 5
Hence, EPS on common Equity of Rs. 10 each = Rs. 5
