Earning Per Share : Simple but still important

Why you invest in Equity?

For earning Profit.

How you can earn that?

When someone will be ready to pay for it.

Why someone will pay extra for the Same?

Because that is more valuable.

And here come the concept of EPS.

When you buy stock of the company, you are expecting that the Profit of the company will increase. It may be through increase in efficiency maybe through any Extra output from new plants etc.

When company earn Profit then all the shareholders are holding right on that Profit. So if company decided to distribute all the Profit as dividend, what is the amount will every outstanding share will receive? That is the EPS.

It is impossible for company to distribute whole as they need to keep some part. Most of the time is it minimum 20%.

You may find Two different types of EPS there in Form 10-K or Annual report. One is Basic EPS, another one is diluted EPS. It’s all due to the convertible like pref. Shares or Debentures or ESOP. Most of the time companies need to Capital so if there is any Equity issue, the EPS is Weighed Average EPS. That is If the issue is come in ninth month of year so it’s impossible to say That the shareholder have right on full earning that is why Weighted Average is calculated.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter