EPS is earnings per share, the net income a company makes in a given period for each outstanding share. EPS is perhaps the key measure of a company's financial success, because it reflects both the company's bottom line (the numerator) and the ownership interests (the denominator) over which earnings must be spread. EPS is also used to calculate the company's price-earnings ratio (ie, stock price divided by EPS), the most widely recognized valuation measure for determining whether a stock is fairly valued. Although the calculation of EPS would appear to be a simple matter of dividing net income by the number of shares, EPS computation is anything but straightforward. Under Statement of Financial Accounting Standard 128, the calculation of the weighted-average number of common shares outstanding (ie, the denominator for EPS) is often complicated. Furthermore, if the company has a complex capital structure with dilutive securities like options and warrants, the company has to calculate (again, with much difficulty) and present two EPS figures: a basic EPS, and a diluted EPS that recognizes the potential effect of dilutive securities. |
