If analysts merely predict an increase in EPS, that forecast alone can lead to a surge in stock price.Ī price-earnings ratio (P/E ratio) A ratio computed by dividing current market price of an entity’s stock by the latest earnings per share it is used to help predict future stock prices based on anticipated EPS figures. Therefore, constant and wide-scale speculation takes place about future EPS figures. Why is the EPS reported by a corporation so closely monitored by the investment community?Īnswer: The simple reason for the public fascination with EPS is that this number is generally considered to be linked to the market price of a company’s capital stock. disclosed EPS of $1.20 on its income statement for the year ended December 31, 2008. GAAP, public companies are required to present EPS for each period that net income is reported. Corporations even call press conferences to announce their latest EPS figures. Question: No single “vital sign” that is computed to help investors analyze a business and its financial health is more obsessively watched than earnings per share (EPS). For the year ended December 31, 2008, PPG reported net income of $538 million for a return on equity of 14.4 percent. return on equity = net income/average shareholders’ equityįor example, PPG Industries began 2008 with total shareholders’ equity of $4,151 million and ended that year with a balance of $3,333 million. It is simply the reported net income divided by average shareholders’ equity for the period. How does an interested party calculate the return on equity reported by a business?Īnswer: Return on equity reflects the profitability of a company based on the size of the owners’ claim to net assets as shown primarily through contributed capital and retained earnings.
One common measure is return on equity (ROE) Ratio computed to measure the profitable use of a business’s resources it is determined by dividing net income by average shareholders’ equity for the period. They include ratios, numbers, percentages, and the like that are commonly studied by investors as an indication of current financial health and future prosperity. Question: Throughout this textbook, various vital signs have been presented. Identify the informational benefit provided by diluted EPS.Explain the relevance of the P/E ratio.Calculate basic EPS with or without the existence of preferred stock.Discuss the reasons that earnings per share (EPS) figures are so closely watched by investors.At the end of this section, students should be able to meet the following objectives:
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