What Is Your EPS? Issues in Computing and Interpreting Earnings Per Share

Abstract

This paper examines several problematic issues in the presentation of information related to earnings per share (EPS) that are common to college textbooks and popular investment websites. U.S. generally accepted accounting principles (GAAP) require disclosure of EPS for all publicly listed firms. In fact, EPS is the only financial ratio required by GAAP and it is the only financial ratio with a formula specified by GAAP. Despite these facts, many college textbooks and investment websites present incorrect formulas for the computation of EPS. Furthermore, many textbooks and investment websites either explicitly or implicitly encourage students and investors to interpret EPS incorrectly. This paper discusses these issues and contrasts proper EPS computation and interpretation with the most common errors in computation and interpretation.

Keywords: Earnings per Share, EPS, Price-Earnings Ratio, PE Ratio

JEL Classification: G32, M41