Earnings Per share (EPS). Intermediate Accounting | CPA Exam

In this video, I explain the earnings per share (EPS).
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Earnings Per Share (EPS) is a financial metric that represents the portion of a company's profit allocated to each outstanding share of common stock. It is a key indicator of a company’s profitability and is often used by investors to assess a company's financial health and make investment decisions.

Net Income: The total earnings (profit) of a company after all expenses and taxes have been deducted.
Preferred Dividends: The dividends that must be paid to preferred stockholders before any dividends can be paid to common stockholders.
Average Outstanding Shares: The average number of shares outstanding over a specific period, usually a quarter or a year.

Types of EPS:
Basic EPS: Calculated by dividing the net income, less preferred dividends, by the weighted average number of shares outstanding during the period.

Diluted EPS: Takes into account all convertible securities (like convertible preferred stock, stock options, and convertible debentures) that could potentially dilute earnings per share. Diluted EPS is usually more conservative and is generally considered a more accurate measure of a company's profitability.

Importance of EPS:
Investment Decisions: Investors often use EPS to decide whether to buy or sell a company’s stock. Generally, a higher EPS indicates a more profitable company, assuming all other factors are equal.

Company Performance: It is a direct reflection of a company’s profitability and can be used to compare performance against other companies in the same industry.

Dividend Calculation: It helps in determining the dividends per share a company might pay to its shareholders.

Price to Earnings Ratio: EPS is used in calculating the Price to Earnings (P/E) ratio, which helps investors determine the relative value of a company's shares.

Limitations:
It does not consider the capital structure of a company.
It does not account for variations in risk between companies.
It can be manipulated by changes in the number of outstanding shares.
It does not provide insights into the sources of a company's revenues or the sustainability of its earnings.