Background
Earnings Per Share (EPS) represents the amount of a company’s profit that is assigned to each outstanding share of common stock. It serves as an indicator of a company’s profitability on a per-share basis.
Historical Context
The concept of EPS has evolved alongside the modern financial accounting practices. Initially, financial metrics aimed at informing investors about the profitability of their investments were less uniform, but EPS emerged as a standardized measure over time, particularly with advancements in financial reporting regulations and performance metrics for publicly traded companies.
Definitions and Concepts
Earnings per Share (EPS) is calculated by dividing the net profit of a company by the number of outstanding ordinary shares. The formula is:
\[ EPS = \frac{Net\ Income}{Average\ Outstanding\ Shares} \]
EPS is essential as it provides insight into a company’s financial health and is often used as a metric to evaluate its performance over different periods.
Major Analytical Frameworks
Classical Economics
In classical economics, EPS can relate to the distribution of a company’s profits, adding context to issues such as dividends and retained earnings.
Neoclassical Economics
Neoclassical economics, focusing on the allocation of resources, utilizes EPS in models to predict stock prices. The higher the EPS, the better the company’s performance, per neoclassical theories of firm behavior.
Keynesian Economics
Keynesian economics emphasizes broader macroeconomic factors over firm-specific metrics. However, EPS may be used to gauge overall economic health, as higher EPS across industries indicates a prosperous economic environment.
Marxian Economics
From a Marxian perspective, EPS might be analyzed to critique the distribution of profits and the allocation of wealth within a capitalist economy, probing into issues of equity and capital accumulation.
Institutional Economics
Institutional economics would interpret EPS by focusing on institutional contexts, such as market structures and financial regulations affecting company profitability on a per-share basis.
Behavioral Economics
Behavioral economics would explore investor perceptions and irrational biases that may influence the relation between EPS and stock prices, emphasizing how cognitive biases could affect investor decisions.
Post-Keynesian Economics
Post-Keynesian economics might analyze EPS as part of broader discussions on income distribution and the role of fiscal policy in shaping company profits and dividend distributions.
Austrian Economics
Austrian economics might critique the predictive assumptions behind EPS, focusing on individual decision-making processes and market dynamics that influence share prices.
Development Economics
In development economics, EPS could be pivotal in assessing the performance of firms in developing economies, analyzing how profit distribution impacts economic growth and development.
Monetarism
Monetarism might incorporate EPS in its analysis of business cycles, especially in relation to how monetary policy impacts corporate profitability and thus EPS.
Comparative Analysis
EPS is extensively compared across companies within the same industry to gauge relative performance. Analysts use EPS to assess whether a firm is performing better or worse than its peers.
Case Studies
Several high-profile companies often serve as case studies for EPS analysis:
- Apple Inc. - Illustrates how high EPS correlates with substantial stock price appreciations.
- General Electric - Demonstrates the impact of EPS fluctuations on investor sentiment.
- Amazon - Showcases EPS despite relatively small profit margins due to reinvestment.
Suggested Books for Further Studies
- Financial Statement Analysis by Martin Fridson
- The Intelligent Investor by Benjamin Graham
- Security Analysis by Benjamin Graham and David Dodd
Related Terms with Definitions
- Dividend: A distribution of a portion of a company’s earnings to its shareholders.
- Net Income: The total profit of a company after taxes and all expenses have been deducted from total revenue.
- Outstanding Shares: The total shares of stock that are currently owned by shareholders.
- Price-Earnings Ratio (P/E): A valuation ratio of a company’s current share price compared to its per-share earnings.
