Earning Per Share (EPS)
Measures the profit available to the equity shareholders on a per share basis, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to the equity shareholders by the number of the outstanding shares. The profits available to the ordinary shareholders are represented by net profits after taxes and preference dividend. Thus,
Earnings Per Share (EPS) is a widely used ratio. Yet, EPS as a measure of profitability of a firm from the owners point of view, should be used cautiously as it docs not recognize the effect of Increase In equity capital as a result of retention of earnings. In other words, if EPS has Increased over the years, it does not necessarily follow that the firm’s profitability has improved because the increased profits to the owners may be the effect of an enlarged equity capital as a result of profit retention’s, though the number of ordinary share outstanding still remains constant. another limitation of EPS is that it does not reveal how much is paid to the owners as dividend, nor how much of the earnings are retained in the business. It only shows how much earnings theoretically belong to the ordinary shareholders (per share basis).
As a profitability ratio, the EPS can be used to draw inferences on the basis of (i) its trend over a period of time. (ii) comparison with the EPS of other firms, and (iii) comparison with the industry average.