Earnings per Share and Dividend per Share
Overview
Earnings per Share (EPS) and Dividend per Share (DPS) are fundamental metrics used by investors to evaluate the financial health and performance of a company. These metrics provide valuable insights into a company's profitability and its ability to distribute profits to shareholders. In this article, we will explore the concepts of EPS and DPS, their calculation, significance, and how investors can use them to make informed investment decisions.
Earnings are profits in a business. Earnings can be definite at various levels. For instance, net profits are the profits available to the equity owners. Earnings before Interest and Taxes (EBIT) are available to provide equity and debt holders. Earnings before Depreciation Interest Taxes and Amortization (EBDITA) are the earnings available to a business to restore its assets over time and serve both equity and debt holders. Earnings of previous years are called historical earnings. Trailing earnings refer to the earnings of the latest four quarters, intended on a rolling basis. Forward earnings are the earnings computed based on future projections.
Earnings per Share (EPS)
The net profits of a company are distributed among its shareholders. Earnings per share (EPS) represent the portion of the net profit allocated to each outstanding share. It indicates the profitability of the company per share issued.
EPS is calculated by dividing the net profit by the number of outstanding shares.
EPS = Net Profit / Number of Outstanding Shares
For example, if a company has a net profit of Rs. 20 lakh and 4 lakh outstanding shares, the EPS would be Rs. 5 (Rs. 20 lakh / 4 lakh).
A higher EPS signifies greater profitability and is preferable to lower EPS when comparing investment options. EPS is an important factor influencing a share's price.
Types of EPS
There are two types of EPS that investors should be aware of:
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Basic EPS: Basic EPS is calculated by dividing the company's net income by the total number of outstanding shares. It is considered the most conservative measure of EPS as it does not take into account the impact of potentially dilutive securities such as stock options or convertible bonds.
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Diluted EPS: Diluted EPS takes into account the potential impact of dilutive securities on the company's EPS. Dilutive securities are financial instruments that can potentially increase the number of outstanding shares, such as stock options or convertible bonds. Diluted EPS is calculated by dividing the company's net income by the total number of outstanding shares, including the impact of dilutive securities.
Significance of EPS
EPS is a key metric used by investors to evaluate a company's financial performance and profitability. It is often used in conjunction with other financial ratios and metrics to assess a company's overall health and growth potential. A company with a consistently high EPS may be viewed favorably by investors as it indicates strong profitability and potential for future growth.
What is Dividend per Share (DPS)
The dividend is typically expressed as a percentage of the face value of shares, representing the portion of the profit distributed to shareholders.
The formula for calculating DPS is as follows:
DPS = Total Dividends Paid / Total Number of Outstanding Shares
For instance, a 50% dividend declared by a company would equate to a dividend of Rs. 5 per share with a face value of Rs. 10 (10 * 50% = 5).
This is known as Dividend per Share (DPS).
DPS is an important metric for income investors who rely on dividends for a portion of their investment returns. Companies that pay a consistent and growing dividend are often viewed favorably by income investors as they provide a steady source of income.
Relationship Between Earnings Per Share and Dividend Per Share
EPS and DPS are closely related, but they serve different purposes. EPS measures a company's profitability, while DPS measures the portion of that profitability that is distributed to shareholders. In general, companies with a high EPS are more likely to pay a higher dividend per share, but this is not always the case.
Conclusion
Earnings per Share (EPS) and Dividend per Share (DPS) are important metrics used by investors to evaluate a company's financial performance and profitability. EPS measures the portion of a company's profit allocated to each outstanding share of common stock, while DPS measures the portion of earnings that is paid out to shareholders in the form of dividends. Both metrics provide valuable insights into a company's financial health and can help investors make informed investment decisions.
Frequently Asked Questions
Is EPS And Dividend The Same?
No, EPS (Earnings Per Share) and dividend are not the same. EPS is a measure of a company's profitability per outstanding share of its stock, while dividends are the portion of a company's profits distributed to shareholders.
Difference Between Earnings Per Share And Dividends
Earnings Per Share (EPS) is a profitability metric that indicates how much profit a company generates per outstanding share of its stock. Dividends, on the other hand, are a portion of a company's profits paid out to shareholders. EPS is a measure of profitability, while dividends are a distribution of profits to shareholders.
Does Earnings Per Share Include Dividends
No, earnings per share (EPS) does not include dividends. EPS is calculated by dividing a company's net income by the total number of outstanding shares, while dividends are a distribution of a portion of the company's profits to shareholders after EPS is calculated.
What is meant by earnings, EBIT and EBITDA?
Earnings are profits in a business. Earnings can be definite at various levels. For instance, net profits are the profits available to the equity owners.
Earnings before Interest and Taxes (EBIT) are available to provide equity and debt holders.
Earnings before Depreciation Interest Taxes and Amortization (EBDITA) are the earnings available to a business to restore its assets over time and serve both equity and debt holders. Earnings of previous years are called historical earnings.
Trailing earnings refer to the earnings of the latest four quarters, intended on a rolling basis.
Forward earnings are the earnings computed based on future projections.
Difference Between Earnings Per Share Dividend?
Earnings per share (EPS) and dividend are related but distinct concepts in finance. EPS is a profitability metric that indicates the portion of a company's profit allocated to each outstanding share of its stock. Dividend, on the other hand, is the portion of a company's profits distributed to shareholders. While EPS is a measure of profitability, dividends represent a company's commitment to sharing its profits with shareholders.
