The concept of earnings per share is required in share market operations. Companies issue shares to garner resources from the market. Investors rely on several financial market parameters to determine the shares that would be purchased. Earnings Per Share is one such ratio. It is used for the purpose of evaluating the prices of the shares.
More about the Concept of Earnings Per Share
Earnings Per Share is a statistical measure. It is calculated using the following formula,
Earnings Per Share= Net income/Number of outstanding shares
Earnings Per Share relates income with ownership. It is a per share concept. Earnings per share is also referred to as EPS. One look at a company’s EPS records gives an idea of its growth in earnings over the years.
So a comparison can be made between the company’s earnings and its dividend payouts. Information about the prevalent share price of each year can also be obtained from the earnings per share statistics.
Drawback of EPS
As per the concept of earnings per share the EPS calculations use past data. Since the future is not an exact replica of the past, relying only on this kind of share market ratio is not always deemed wise. Plus, the problem of data manipulation for accounting purpose may lead to a biased statistical output.