If the EPS ratio is a big one, it means most of the earnings of the business are paid to the owners and not external financiers such as bondholders. Whether purely from owners (internal) or otherwise. Cheap source of finance-EPS portrays the level of financing of the business. The following are some of the aspects that cut across EPS of a business.ġ. in this case it means the returns are promising Applicability of EPS in Investment Decision MakingĮPS perspective is of much applications in decision making. A low level of EPS score implies worthless investment unlike were the rate is at 1.50. EPS is paramount because for the existing investors, they can gauge the worth of their investment. This will guide the investors to know their mission why the business exist.Ĥ. Price/Earnings ratio predictor-the investors are in a position to assess the rate at which the changes in the market value of the business has as compared to the earnings power or the income generating power the firm has. If the EPS is very small or low, chances of being issued with bonus shares (Script issues) is high and if EPS ratio is high, probably cash dividends are sure.ģ. Dividend Payouts-EPS gives you a hind the nature of dividends the company may declare at the end of the year. So the EPS guides you whether the firm you harvested in or you intent to invest in can pay good returnsĢ. You see, the bigger the EPS the bigger the engine size of the company. Profitability gauge-EPS is the income generating engine like that of a motor vehicle. Why is it important as an investor to know the level of a business EPS?ġ. This can be determined may be by the level of its asset tangibility or unique strategic moves which make a firm invest profitably In other words, it shows the abilities a firm has in generating income. Importance of EPSĮPS shows the earning power of an organization. For example, an EPS ratio of 0.60 means that for every 1 unit of currency invested in ordinary shares, the business will reward the owners some 0.6 units of the investing currency. The company had outstanding ordinary shares of 2,000,000.ĮPS shows the amount of earnings (returns) that the owners of the company expect to get from every ordinary share they have invested in. The management declared preference dividend of $1,500,000 at the end of the year. STEP 5: Compute Weighted EPS value using this formulaĪBC company had net income $7,500,000 in 2018. NB: If there are any equivalent ordinary stocks to be determined, such as converted bonds or bonus issue or sell of stock to employees at a discount, this should be factored herein STEP 4: Establish the exact number of ordinary shares as per balance sheet end of year dates STEP 3: Compute the PAT less Preference Dividend. STEP 2: Compute the amount of preference dividends proposed and paid so the steps of determining WEPS is slightly different to the one for basic EPS as shown below For example conversion of preference shares and bonds in to ordinary shares, bonus issue etc. Weighted EPS is more reliable because it factors in any changes in the course of the year that can change the TRUE number of outstanding ordinary shares or changes true value of the current EPS. STEP 3: Compute Basic EPS value using this formula STEP 2: Establish the exact number of ordinary shares as per balance sheet end of year dates Weighted EPS Steps of Computing Basic EPS The types of EPS is based on the criteria of expected value addition changes on the number of common stock or outstanding ordinary shares. Total ordinary share capital is the total number of ordinary shares issue and fully paid Types of Earnings Per Share (EPS) Preference shareholder Dividends (proposed and paid(i.e. Net Profit after Tax (PAT) is the earnings the business has generated at the end of the financial year net of two thingsĢ.
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