What is EPS?

What is EPS?

What is EPS?

The EPS is a measure that is used to know the degree of profitability of a company taking its net profit as a reference. The acronym EPS ( Earnings Per Share) in Spanish corresponds to BPA (Earnings per share) since the EPS measures the portion of that net profit that corresponds to each share of the company.

How is it calculated?

EPS is calculated by dividing the net profit owned by an entity by the number of shares held by the entity during a specific period of time. Normally the number of shares of a company tends to vary, which is why the “period of time” factor is important and changes according to the moment the company is going through. This makes it possible to calculate the EPS of the last year or the last six months.

Two modalities of EPS

There are two types of EPS. One of them is the basic one that occurs when the company’s capital is made up of common shares, non-convertible preferred shares and non-convertible debt. The fact that they are non-convertible indicates that none of these assets can change their characteristics or be transformed into others.

Basic EPS is calculated by subtracting the net profit from preferred stock dividends, and the result of this operation is divided by the average number of outstanding common shares.

The other type of EPS is diluted EPS, which is made up of dilutive financial assets that are options, warrants, debt, or convertible preferred shares. That is, they can be converted into ordinary shares. In addition, this conversion would increase the number of total shares owned by the company.

The formula to calculate the diluted EPS is more complex than the one applied in the basic one. First of all, you have to subtract the dividends from the preferred shares from the net income. Then to the resulting figure, you have to add the dividends of the preferred shares and the interest of the convertible debt. The result of this operation is divided between the sum of the average of the convertible shares and the shares that have resulted from the transformation of the shares or the convertible debt.

EPS positive or negative?

A company’s Earnings Per Share can be positive or negative. If an entity has losses, the EPS can be negative, although this fact does not indicate that the company is in a critical situation. It can also happen that this measure is applied at the beginning of the business activity or at a time of change and in that case, it is likely that the EPS will not be positive either, but these situations can change over time and in a few months the EPS can change to positive.

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