Earnings Per Share Flashcards, test questions and answers

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What is Earnings Per Share?

Earnings Per Share (EPS) is a measure of a company’s profitability, calculated by dividing the company’s net income by its total number of outstanding shares. It is used to determine the amount of money that each shareholder would receive if all the company’s profits were divided equally among them. EPS is an important indicator for investors, as it gives them an idea of how much their investment in a stock could be worth over time, and helps them compare between companies in the same industry.EPS can also be used to gauge the performance of a company’s management. A higher EPS implies that the management has been able to increase profits without increasing its number of outstanding shares, which indicates that they have been successful in managing the company’s resources efficiently. On the other hand, if EPS falls over time even though there are no changes in share count, it may mean that either costs have increased or revenues have decreased due to poor management decisions.In addition to understanding a firm’s financial performance and evaluating its management decisions, analysts use EPS data to forecast future earnings growth rates and set target prices for stocks. They also use it as one measure when calculating valuation metrics such as price-to-earnings (P/E) ratios or dividend yields. In short, EPS can provide useful information about how well a company is doing financially and how attractive an investment might be for potential buyers or sellers.