Channel: Edspira

Category: Education

Tags: basic earnings per sharepeg ratioearnings per share explainedearnings per share calculationhow to calculate earnings per sharehow to use earnings per sharefinancial accountingwhat is epsearnings per shareearnings per share formulap/e ratioedspirafinancial statements

Description: Earnings per share (EPS) is a company’s net income per share of common stock. It’s calculated by taking the net income available to common shareholders (which is net income minus dividends for preferred shareholders and minus income attributable to noncontrolling interests) and dividing it by the weighted-average number of common shares outstanding. Earnings per share is the most widely used measure of profit. It’s the only ratio that public companies are required to report on the income statement: both U.S. GAAP and IFRS require this. And earnings per share is the accounting metric you’ll hear most about in the financial news, particularly during “earnings season.” So why do people care so much about earnings per share? The answer has to do with valuation. Many investors value companies based on their expected future cash flows. Thus, analysts spend a lot of time trying to predict what future cash flows will be. And what’s the best predictor of future cash flows? Surprisingly, it’s not current cash flows. It’s earnings per share. That’s right, a company’s current earnings per share is better than current cash flows when it comes to predicting future cash flows. This explains why stock performance is more correlated with earnings per share than with operating cash flow. When you divide a company’s stock price by earnings per share, you get the P/E ratio (price-to-earnings ratio). Companies with high P/E ratios are deemed to be expensive whereas companies with low P/E ratios are considered bargains. But when it comes to being a measure of performance, earnings per share isn’t perfect. • For one thing, it doesn’t account for the amount of assets or capital that was employed to achieve the earnings. • It can be increased simply by repurchasing shares. 0:00 What is EPS and how is it calculated? 0:36 Why is EPS the most widely used measure of profit? 1:34 Why do people care so much about EPS? 2:12 P/E Ratio 3:09 PEG Ratio 3:26 Downsides to using EPS as a measure of performance — Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people. — SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • A 44-PAGE GUIDE TO U.S. TAXATION • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • MANY MORE FREE PDF GUIDES * eepurl.com/dIaa5z — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: edspira.com/podcast-2 — GET TAX TIPS ON TIKTOK * tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * edspira.com/index — CONNECT WITH EDSPIRA * Facebook: facebook.com/Edspira * Instagram: instagram.com/edspiradotcom * LinkedIn: linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: twitter.com/Prof_McLaughlin * LinkedIn: linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * edspira.com/about