Accounting & auditingLesson 4 of 5 in the course Measures of Financial Health

Earnings per Share, P/E, and Book Value per Share

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Earnings per share (EPS) expresses how much of a company’s profit is available for each outstanding common share. It is widely followed by investors and is also used to calculate the price/earnings ratio.

Earnings per share is the portion of a corporation’s profit allocated to each outstanding share of common stock. Basic EPS focuses on the earnings available to common shareholders, rather than all shareholders combined.

All flashcards

What is the formula for basic EPS?
Basic EPS=Net income−Preferred dividendsWeighted average common shares outstanding\text{Basic EPS} = \frac{\text{Net income} - \text{Preferred dividends}}{\text{Weighted average common shares outstanding}}.
What does diluted EPS account for?
Potential common shares from securities such as options or convertible securities.
How can a share repurchase affect EPS if earnings are unchanged?
It can raise EPS by reducing the weighted average number of outstanding shares.
What is the price/earnings ratio formula?
P/E ratio=Market price per shareEarnings per share\text{P/E ratio} = \frac{\text{Market price per share}}{\text{Earnings per share}}.
How is book value per common share calculated?
Book value per share=Total equity−Preferred equityTotal common shares outstanding\text{Book value per share} = \frac{\text{Total equity} - \text{Preferred equity}}{\text{Total common shares outstanding}}.

Quiz questions

  1. A share trades at $60, and its earnings per share are $4. What is its P/E ratio?Answer: 15 times
  2. What does diluted EPS estimate in addition to basic EPS?Answer: The per-share effect of securities that could become common shares.
  3. If earnings available to common shareholders stay the same, how can a buyback raise EPS?Answer: By reducing the weighted average number of common shares outstanding.
  4. A company has 600 shares outstanding for three months, then 1,600 for nine months. What is its weighted average share count?Answer: 1,350 shares
  5. Why does a rising EPS not by itself prove that a company's operating performance improved?Answer: EPS can rise because the share count fell, even without a matching earnings increase.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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