The profitability of a firm from the point of view of the ordinary shareholders is analyzed through the ratio `EPS’. It measures the profit available to the equity shareholders on a per share basis, i.e. The amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by the number of outstanding shares. The profits available to the ordinary shareholders are represented by net profit after taxes and preference dividends
Earnings Per Share = (net profit after tax – preference dividend)/ Number Of Equity Shares
This ratio is an important index because it indicates whether the wealth of each shareholder on a per-share basis has changed over the period. The performance and prospects of the firm are affected by eps. If eps increases, there is a possibility that the company may pay more dividend or issue bonus shares. In short, the market price of the share of a firm will be affected by all these factors.