1: earning per share definition
2: how earning per share works
3: earning per share vs price paid per share
4: example of earning per shares
Opening information:
Earning per shares sentence breaks into three words earning, per, and shares. Earning means to obtain the one result of money, per means demonstrating something based on each section, and shares mean pieces of one whole thing.
Earning per share means profits or loss of one item, so now let’s have a look at what is an earning per share, how the earning per share works in the public market among corporate Industries, and what is the difference between the earnings per share and price paid per share, finally one clear example about the earning per shares.
1: earning per share definition
Shothin is running a restaurant Industries, where his business has 23 branches in the total company. Where each branch produces a different kind of income or profits each month.
One restaurant might have a great income and another restaurant would have a low income when compared to any other income.
But a whole branch of profits and losses are accounted together in the income statement for a Shothin restaurant business.
Shothin restaurants make a total of 12 million dollars every year, in some years the income also increases or decreases based on the business performance.
His company had 500 shareholders with yearly profits of 12 million dollars on average and each of the shareholders had the same level of Ownership, so the profits were also equal to all 500 Shares holders.
The profits are distributed by dividing the 12 million dollars equally among the 500 people for 500 shares, which resulted in 24,000 dollars for each shareholder with every share.
Here the 24,000 dollars is the profits of each share from the Shothin restaurant, so the $24,000 profits is the earnings of each share in the Shothin business.
Where this same context applies in the public market among all Corporate Industries, so now let’s dive into how the earnings per share works for all the stock Investors.
2: how earning per share works
The earning per share doesn’t represent any specific single object, instead, it shows the idea of finding one item’s value or price among the whole items.
Therefore earnings per share refers to what would be the cash flow of one share in the whole Corporation shares, the earnings don’t apply and apply to any fixed matter amount. The earnings would be any kind of numbers, but net income equally dividend based on the shares.
The net income is considered as earnings of one Industry, so net income is divided equally among the whole shares. Where you can also call the earnings per share as net income per share.
If one technology public Corporation had 23 billion dollars in net income this year with 18 million shares outstanding, then such a business had 23 billion dollars divided by 18 million shares shows 1277 dollars for each share.
Where 1277 dollars is what is demonstrated as net income per share or earnings per share.
Next, if the automobile industry had 120 billion dollars in net income a year and 1.5 billion shares outstanding in such an automobile company. This resulted in 120 billion dollars divided by 1.5 billion shares elaborating the 80 dollars for each share, where this 80 dollars is known to be an earning per share of the one company.
Moreover, any of the businesses that had a loss in the net income of the company such as a loss of -1.8 billion dollars with 1.2 billion shares outstanding, resulted in -1.8 billion dollars divided by 1.2 billion shares illustrated as a -1.5 earning per share.
So any kind of business earnings per share is generated from diving the total net income with total outstanding shares in a particular business. Most people confuse the earring per share and the price paid per share, so let’s jump into the key difference in it anyway.
3: earning per share vs price paid per share
The difference between the earnings per share and the price paid per share is, that earnings per share are the one used to find the cash flow of business for each share it issued in the market,
On the other side price paid per share refers to how much public stock Investors pay for each share in the stock market for all the issued shares in the public Industry.
The price paid per share doesn’t have any single relation to earnings per share, because the price paid per share is based on investor activities that don’t align with earnings per share. To make you more clear about the earning per shares let’s seen into one clear example below.
4: example of earning per share.
Say company D is the one that is trading at 12 per share in the stock market, and it’s had a net income of 100 million dollars this year with outstanding shares of 10 million.
To find the earning of one share 100 millions dollars divide with a 10 millions shares, which shows 10 dollars per share in earnings. At the same time 12 per shares is the price which are payed by Investors for each listed shares in the business, its had no relation on earning per shares.
Note:
In Rule Investing We not only recommend a formula for earning per share, because the formula makes you blindly follow the rules without any reason.
Rule investing only stated reasonably this calculation, why net income must need to be divided with outstanding shares to find the earnings per share because net income is the one considered as earnings of any business.
People who didn’t understand the reason why we were dividing the net income with outstanding shares also had a chance to blindly follow the below formula to find earnings per share.
Formula:
Earning per share (EPS) = net income/ outstanding common shares.