Advantages and Disadvantages of Earning Per Share
Earnings Per Share is the company earnings that contribute to each individual share, it arrives from the total income and is divided by the number of shares outstanding. Earnings per share only calculate over the commons share, we exclude the preferred share and other types of share.
It is one of the financial tools that show the return that shareholders receive from investing in the company. The investors pay high attention over this ratio as it tells the number of return that they will get. Even the company has huge profits, but it does not mean that the individual shareholder receives a good return.
Earning Per Share Formula
| \[EPS = {Total\ Earnings \over Number\ of\ Outstanding\ Shares}\] |
Advantages of Earning per Share
- Reflect with Share price: the earning per share is one of the factors which has a significant impact on the share price. A company with high EPS will have a higher share price.
- Real profit for investors: EPS reflects a return to shareholders. This tool accurately determines the amount of return that shareholders receive from their investment in addtion to capital gain.
- Easy to calculate: The calculation of EPS is simple and straightforward, we simply take the total profit and divide it by the number of outstanding shares. Both figures can be found in the financial statement.
- Measure company performance: it is one of the tools to measure company performance. The higher the ratio, the better company is performing.
Disadvantages of Earning per Share
- Easy manipulate: Management can manipulate the earning by using different accounting treatments and policies.
- Not taking into account the share price: When we evaluate the company’s performance by using EPS, we completely ignore the share price.
- Negative EPS: When the company is making a loss, there will be a negative EPS. It is very hard to measure the company with negative EPS.
