What is Earnings per Share?
What is Earning per Share
Earnings per share are the total value or earnings realized for each share of the company, by equally dividing the retained earnings to a number of outstanding shares.
Earnings per Share
The profit which a company earns can be divided into 2 forms.
- Retain earnings
Retained earnings are the earnings that the company retains or keeps back from the profits earned, to use it as an investment in the operations of the firm or other business-related aspects.
The retained earnings give a sense of yield (but not the actual) to the shareholders of the firm, as the company invests more of its profit in the operations or expansion of the firm, the shareholders get a sense of better earnings with respect to the investment made, by buying the shares of the firm.
IF we suppose a company “X” with 1000 Nos of outstanding shares and a current price of 200Rs per share realizes a net profit of 50,000 Rs after paying all its expenses from the revenue generated, decides to pay a sum of 10,000 Rs as dividends and retain the rest 40,000 Rs in the form of retained earnings for its future operations
The earnings per share is = (Net profit-dividend) / No of outstanding shares
Net profit-dividend = Retained Earnings
Earnings per share = (50000-10000)/1000
Earnings per share = 40 Rs
As we include the earnings per share with the current price of share of Rs 200 it increases to
Current price of each share = 200+40
In many cases, the company may decide not to allocated any funds to the dividend payments and may retain 100% of the profit in the form of retained earnings
So for the above example with dividends as 0.00 Rs
Earnings per Share = 50000 / 1000 = 50 Rs per share
Current price of share = 250 Rs Per share