Earnings Per Share EPS Explained With Example. FAR CPA Exam.

In this video, we cover earnings per share EPS using an example. This topic is covered in an intermediate accounting course and CPA exam.
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Earnings Per Share (EPS) is a key financial indicator that helps investors understand the profitability of a company on a per-share basis. It's calculated by dividing the company's net income (earnings) by the number of outstanding shares. The formula looks like this:
EPS = Net Income − Dividends on Preferred Stock/ Average Outstanding Shares
EPS= Average Outstanding Shares
Net Income−Dividends on Preferred Stock
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Importance of Earnings Per Share
Earnings Per Share is crucial for investors as it offers a direct insight into a company's profitability and financial health. High or increasing EPS values often indicate a profitable, growing company, making it an attractive option for investors. Conversely, low or declining EPS could signal financial troubles. This metric is widely used in the financial industry to assess company performance, compare potential investments, and forecast future earnings.
Calculation of Earnings Per Share
The calculation of EPS starts with the net income, which is the company's total earnings after expenses, taxes, and costs have been deducted from total revenue. From this figure, any dividends on preferred stock are subtracted since EPS only concerns common stockholders. The result is then divided by the average number of common shares outstanding during the period. This average accounts for any changes in share count due to stock issuance, buybacks, or other factors.
Variations of Earnings Per Share
There are different variations of EPS that investors may encounter, including:
Basic EPS: Calculated using the formula above, basic EPS doesn't adjust for any potential dilution-additional shares that could be created from stock options, convertible securities, etc.
Diluted EPS: Adjusts the basic EPS calculation to include the impact of all potential dilution, providing a "worst-case" scenario EPS. It's particularly relevant for companies with significant numbers of stock options, warrants, or convertible securities.
Using Earnings Per Share in Investment Decisions
Investors often use EPS in conjunction with other metrics and ratios to make informed investment decisions. A common application is the Price/Earnings (P/E) ratio, which divides the company's current share price by its EPS. The P/E ratio helps investors assess if a stock is overvalued, undervalued, or fairly valued compared to the market or its peers.
Conclusion
Understanding Earnings Per Share is essential for anyone involved in investing or analyzing stocks. It provides a clear view of a company's profitability on a per-share basis, allowing for easy comparison across companies and industries. As such, EPS is a fundamental concept in finance and a critical metric for investors, analysts, and corporate managers alike.
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[@mugandaje]

Testing in June but I suspect that this is a need to know on the exam!!

[@tarekawad4256]

Thanks professor Farahat for the effort. Question, On Nov 01, they added 60,000 shares + 91,000 shares, shouldn't the total be 151,000 shares?