Earnings per Share

Earnings per Share (EPS) is a ratio that tells you how much profit a company has earned for each equity share it has issued. It is one of the most closely watched numbers by equity shareholders because it directly links the company’s profitability to the value of their shares.

The formula is:

EPS = Profit available for equity shareholders / Number of Equity Shares

The numerator — “Profit available for equity shareholders” — is not simply the net profit shown in the Profit & Loss statement. You have to first deduct the preference dividend from the Profit after Tax (PAT). Preference shareholders have a prior claim on profits, so only the remaining profit belongs to the equity shareholders.

Profit available for equity shareholders = Profit after Tax – Dividend on Preference Shares

The denominator is the total number of equity shares outstanding. If the company has issued bonus shares or made a stock split during the year, the number of shares used in the calculation must be adjusted for the period they were outstanding.

Why is EPS so important? From the equity shareholder’s point of view, a higher EPS means the company is generating more profit per share they own. This directly influences the market price of the share — a rising EPS often pushes the stock price up. Investors also use EPS to compare one company’s profitability with another’s, regardless of their different sizes. It helps them judge whether the earnings are reasonable and whether the company has the capacity to pay dividends. …