Chapter 20, Problem 20.1Q

To determine

To explain: The use of earnings per share information by the financial statement analysts.

Answer to Problem 20.1Q

Earnings per share is a measure which is useful in order to make ease of evaluation for all the investors before making investment to a particular company.

Explanation of Solution

Earnings per share:

EPS or Earnings per share measure the level of earnings that are finally payable to the investors or the shareholders of the company.

• An earnings per share is a measure which is used by various investors before investing to evaluate the price earnings ratios of stocks.
• It is considered as an important measure to help the investors to evaluate the company’s financial position overtime in which they have invested their funds.
• It can be calculated as earnings attributable to holders divided by the number of shares of a particular financial year. The formula for this same is given below:

$\text{Earnings}\text{per}\text{share}=\frac{\text{Earnings}\text{attributable}\text{for}\text{equity}\text{holders}}{\text{Weighted}\text{average}\text{number}\text{of}\text{shares}\text{.}}$

Conclusion

Therefore, EPS is important for the shareholders to evaluate a company’s financial position in order to make appropriate investment decision.