What is Earnings per Share?

by admin November 05, 2017
What is Earning Per Share, Wealthhunterindia

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.

  1. Dividends
  2. 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

Where

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

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