Why do we need to know how to calculate Earnings per Share?
Investors love to use the earnings per share calculation when assessing a company’s performance. Why?
Because it’s a quick and easy way to get a snapshot of the company’s performance and gives them an estimate of how much they’ll make per share if they buy into your company.
The net profit figure itself would be a good starting place also, but it could contain one off, large unusual items, which might distort the results.
Earnings per share takes out discontinued operations and shows how much the company made per share from continuing operations.
This gives investors a better idea about the stability of the earnings as discontinued operations might cause a large gain or loss in the financial statements for that period.
Investors should also keep an eye on the trend of the company’s EPS, so one off large items don’t distort their assessment.
Diluted EPS can also act as a warning to investors that their investments may be diminished if potential ordinary shares are converted into actual ordinary shares.
This would result in the other ordinary shareholders receiving less dividends.