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Which of the following is the equation used to determine earnings per share (EPS)?
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14. Financial Statement Analysis
Ratios: Earnings Per Share (EPS)
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The amount of income earned per each share of a company's outstanding common stock is known as:
A
Earnings Per Share (EPS)
B
Dividend Yield
C
Return on Equity (ROE)
D
Price-Earnings Ratio (P/E Ratio)
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Understand the concept of Earnings Per Share (EPS): EPS is a financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock. It is a key indicator of a company's profitability.
Differentiate EPS from other financial metrics: Dividend Yield measures the annual dividend income relative to the stock price, Return on Equity (ROE) evaluates profitability relative to shareholders' equity, and Price-Earnings Ratio (P/E Ratio) compares the stock price to earnings per share.
Recognize that EPS specifically focuses on income earned per share, making it distinct from metrics like Dividend Yield, ROE, or P/E Ratio, which serve different analytical purposes.
Relate EPS to its formula: EPS = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding. This formula helps calculate the income earned per share of common stock.
Conclude that the correct answer to the problem is Earnings Per Share (EPS), as it directly corresponds to the definition provided in the question.
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