Earnings Per Share Ratio

Earnings Per Share Ratio is a type of Profitability Ratio that determines the net profit of the company per equity share wise. This ratio breaks down the net profit of a company to the level of equity shares.
Earnings Per Share (EPS) Ratio = Net Profit / Number of Equity Shares
Where,
  • Net Profit = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation /Amortization + Interest Expenses + Tax paid)
  • And Number of Equity Shares is the total count of common share of a company (excluding Preference Shares)
  • Earnings per Share Ratio is in the form of an amount (Rs.) i.e. an EPS of 5 implies earning of Rs. 5 on each common equity.

Significance and Interpretation

  • EPS Ratio gives a simple and straight formula for the investors that are concerned only with returns on the company.
  • The value of EPS alone cannot be used to compare the return of two companies as the Price of Common Equity may differ from company to company.

Examples

Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the EPS Ratio for M/S XYZ Ltd.
Particulars Amount (in Rs.)
Equity Share Capital @ Rs 10.00 each 5000000.00
EBIT (Earnings Before Interest and Taxes) 4000000.00
Interest Expenses 1000000.00
Tax Payable 500000.00
  • Solution:
  • Net Profit = EBIT – Interest Expenses – Tax payable = Rs. 2500000
  • Total Number of Common Equity = 5000000 / 10 = 500000
  • EPS = Net Profit / Total Number of Common Equity = 2500000 / 500000 = Rs. 5
  • Hence, EPS on common Equity of Rs. 10 each = Rs. 5
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