The phrase earnings per share reflect the profitability of a company. It is one of the many parameters that are analyzed by investors, stake holders, analysts, etc to determine the determine the financial performance of a company. It the ratio of the total profit generated by a company to the total number of shares issued by that company.
Earnings Per Share - Look Carefully
At times, if a company decides to buy back its shares, the number of shares that are outstanding in the market will decrease. This will result in the increase in Earnings per share without actually increasing any income or profit. So, it must be noted that various circumstances should be considered along with different ratios to rightly judge the financial health of any company.
So, theoretically a high earnings per ratio gives the impression that the company is capable of rewarding its investors with higher dividend. But it should be noted that the whole of the income is not distributed as dividend, part of the income is retained by the company for reinvestment, growth, etc.
As obvious, the earnings per share ratio can be even negative. This happens for the period when the company has reported a loss. So this ratio is capable of giving some insight to a company.
Recommended Read :
- What are Financial Statements?
- What is a Balance Sheet?
- Financial Statement of a Company 6 Important Points
- What is a Financial Ratio?
- What is Meant By Financial Health of a Company?
- What are Company Earnings?
- What is Working Capital?
- Calculate Working Capital
- What is Earnings Per Share?
- What are Cash Reserves?
- What is Break Even Point of a Company?
- What are Current Liabilities?
- What are Long Term Liabilities?
- What is Debt to Equity Ratio?
- What is Dividend Payout Ratio?
- What is Dividend Yield?
- What is Meant By Liquidity of Funds?
Earning per share from the investor point of view is the amount of money earned per share. For example if Mr.A invest Rs 1000 in the share market and buys 50 shares at Rs 20 each. He is now selling it after a period of 6 months for a profit of Rs 1000. Will earning per share be calculated on the basis of single share? Will the time factor be not considered?
Each year the company has to provide an annual report. The company can work with a profit or with a loss. Both outcomes affect earnings per share as it is nicely pointed out in the article. Positive earnings per share mean company have worked with profit and negative earnings per share can give with the information that the company did not do well the previous year.
Comments are closed.