How to interpret EPS

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How to interpret EPS

EPS is one of the most commonly used financial parameters to evaluate a stock. EPS is a base for calculating the Price Earning or commonly known as the PE ratio of a share. A consistent growth in turnover and profits will lead to higher EPS growth. Higher or lower PE ratio should always be compared with its peers having parallel business activity and of similar size to evaluate whether a stock is undervalued or overvalued.

 

Formula

Basic EPS = (Net Profit - Preferential Dividend) Equity shares outstanding Diluted EPS = (Net Profit - Preferential Dividend) (Equity shares outstanding including warrants, stock options, convertible debentures and other potential sources of dilution in equity)

 

Example

Net profit Rs 200 crore Total Equity shares: 50 crore Basic EPS: 4 (200/50) Net profit Rs 200 crore Equity shares: 70 crore Warrants: 5 crore Stock options: 10 crore Convertible Debentures: 15 crore Total equity shares including warrants, stock options, convertible debentures: 100 crore Diluted EPS: 2 (200/100)

 

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