Capital Structure Interview Question:

Explain Earnings Per Share (EPS). How is it calculated? What is its significance?

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Earning per share (EPS) is the amount of earning per each share of a company's stock. Companies require the EPS for their each income statement which shows about the continuing operations, discontinued operations, net income and outstanding items. EPS doesn't depend on the increase or decrease of the earning power of the company and gets calculated over number of years.

How is it calculated?

Earnings per share ratio (EPS Ratio) is calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. It is a small variance of return on equity capital ratio. The formula of Earning per share ratio is given as:-

“[Earnings per share (EPS) Ratio = (Net profit after tax - Preference dividend) / No. of equity shares (common shares)]”

What is its significance?

Earnings per share is a measure of profitability and it is viewed as the comparative earnings or the earning power of the respected firms. It is used from last four quarters but it can also be used to estimates the expected earnings of the next quarters as well.
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