Earnings per share (EPS) is one of the many financial  ratios computed in financial ratio analysis.

Publicly owned companies must report EPS below the net income line in their profit andloss statements. This is demanded by generally accepted accounting practices (GAAP). The EPS gives the investung public a way of determining the amount the business earned on its stock share investments. In other words, earnings per share tells shareholders how much net profit the business operations earned for each stock they own. This financial ratio is computed by dividing net income by the total number of capital share. It’s important to the shareholders who require the net income of the business to be communicated to them on a per share basis so they can compare it with the market price of their shares.

Private firms don’t have to report earnings per share because shareholders focus more on the company’s agregate net income.

Companies on the Stock Exchange actually report 2 earnings per share figures, unless they have what’s called a simple capital structure. A majority of publicly-held companies although, have complex capital structures and have to report two earnings per share figures. One is called the basic EPS; the other is called the diluted EPS. Basic EPS is based on the number of shares that are outstanding. Diluted earnings are based on sharesthat are outstanding and stocks that may be issued in the future in the form of share options.

Clearly this is a complicated process. An accountant has to modify the earnings per share formula for any number of happenings or changes in the business. A company may issue additional stock during the year and buy back some of its own stocks. Or it may issue several classes of shares, which will cause net income to be divided into two or more pools – one pool for each class of shares. A merger, acquisition or divestiture will also affect the formula for EPS.