Earnings per share is one of the most essential indicators for investors. An investor looks for the most profitable companies on the stock exchange to invest in and buy their shares. Therefore, he is very interested in earnings per share, which is nothing more than the profit of a company divided among its shares on the stock exchange.
This makes it much easier to understand the profitability of a company, as dividends can be assumed. Come and understand more about it in our article!
What is earnings per share?
Earnings per share is nothing more than the company’s profit divided by the number of securities available in its name on the stock exchange. The stock market exists so that investors can buy these shares of the company and thus participate in its profit.
These companies that are also called open capital receive this name precisely because they allow people outside their list of partners and who do not participate directly in their company to participate in their capital.
There is a benefit for companies in this case, which receive capital from third parties through the sale of their shares. However, the company “pays” for it, or at least is obliged to pay when it makes a profit.
When a company does well, it generates dividends, which are nothing more than part of its divided profit. for its shareholders. So knowing the Earnings per share is to be able to predict how much each shareholder will earn by buying the shares of that company. A necessary calculation for anyone wanting to enter the investment market.
How does earnings per share work?
Earnings per share is, as we mentioned, the amount of a company’s profit divided by the number of shareholders. This calculation is for investors to have an idea of how much dividend they will earn.
But be careful, this earnings per share are not fully and completely shared among the shareholders. They are just an indication. A company could never share all of its profit among shareholders, it still needs to invest in itself.
Of course, it’s also important to emphasize the fact that it’s the company’s profit divided among shareholders, not its revenue. Profit is what remains after all liabilities are written off, which is quite different from the capital or revenue that a company can earn.
What is the profit of a shareholder?
Shareholder profit is not earnings per share, as we have commented. Just an indicative. But then what would be the profit of the shareholder? This question has no exact answer. There is no formula to calculate shareholder profit exactly.
We can only have an idea of what profit this might be, with earnings per share and other factors. Countless things impact on what a shareholder will receive from the company, among these elements we can highlight:
- Earnings per share;
- Dividend payment frequency;
- Company profile;
- Market situation;
- Number of shares.
Therefore, there is no formula that can understand in itself all these possible variables.
Because it’s important?
If earnings per share doesn’t say exactly what the dividends are, why does it matter? Now, it is important because it says enough for the shareholders. Investors only need to know at the end of the day whether or not a company has enough profit to pay the dividend and how big that profit is when divided by the stock.
Earnings per share contain important information about the financial market and are an essential part of what a shareholder needs to know in order to invest.