Earnings Per Share (EPS) Ratio:

Definition:

Earnings per share ratio (EPS Ratio) is a small variation of return on equity capital ratio and is calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares.

Formula of Earnings Per Share Ratio:

The formula of earnings per share is:

Earnings per share (EPS) Ratio = (Net profit after tax − Preference dividend) / No. of equity shares (common shares)

Example:

Equity share capital ($1): $1,000,000; 9% Preference share capital: $500,000; Taxation rate: 50% of net profit; Net profit before tax: $400,000.

Calculate earnings per share ratio.

Calculation:

EPS = 1,55,000 / 10,000

= $15.50 per share.

Significance:

The earnings per share is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased.