Correct Answer:
A. Net income / Number of shares outstanding
Earnings Per Share (EPS) is a crucial financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock. It's a widely used indicator of a company's profitability and is closely watched by investors.
The correct answer is A: Net income / Number of shares outstanding. This formula directly calculates how much profit the company has generated for each individual share of its common stock. Net income represents the total profit available to common shareholders after all expenses, interest, and taxes have been paid.
Let's examine why the other options are incorrect:
- B: EBIT / Shares would calculate earnings before interest and taxes per share. This figure does not represent the profit available to common shareholders because it excludes interest expenses and taxes.
- C: Net income / Sales calculates the Net Profit Margin, which measures how much net income is generated for every dollar of sales, not per share.
- D: Dividends / Shares calculates Dividends Per Share (DPS), which is the amount of dividends paid out for each share. This is different from EPS, which represents the total earnings attributable to each share, whether distributed as dividends or retained.