Definition: The net profit that a company has earned over the course of a quarter (ie: three months) or year for each share of its stock that is outstanding, as follows: total company net profit / number of shares of the company outstanding.
Example: Pro Corporation has sold 1 million shares of stock to the public. In the first quarter of the year (ie, January, February and March), it achieved a net profit of $2 million. Its earnings per share (eps) is $2 million net profit / 1 million shares outstanding, or $2.
Investeach explains: The term “net” means what’s left after subtracting all expenses and taxes from all the money the company took in. We say these were “netted out”. Net profit also goes by the names net income and earnings.
EPS is the most important determinant of a company’s stock price. Rising EPS means that a company is generating more profit on behalf of its owners, making the shares more valuable.
Notice that if a company in need of more money to grow the business decides to sell new stock, EPS will drop as the company’s profits now have to be spread out among more shares. This is known as dilution. The opposite can happen as well. If the company has extra cash, it can purchase shares from its shareholders. This makes them Treasury stock, meaning that they’re officially retired. With less shares outstanding, EPS will rise even though the company did not achieve more profit!
Riddle me this:
1. Over what periods of time do companies add up and report their profits?
2. What does the term “net” mean?
3. By what other names does Net profit go?
4. What impact does eps have on a company’s stock price?
5. Why might a company decide to issue more shares?
6. What will this do to eps?
7. What is this effect referred to as?
8. Identify how a company can raise its eps without increasing profits.