What does Earnings Per Share (EPS) measure?

Earnings Per Share (EPS) is a key financial metric that signifies the portion of a company's profit allocated to each outstanding share of common stock. It effectively measures the profitability of a company on a per-share basis, allowing investors to gauge the financial performance of a firm in relation to each share they own. This is calculated by taking the net income of the company, subtracting any dividends on preferred stock, and then dividing that number by the total number of outstanding shares of common stock.

Understanding EPS is crucial for investors because it provides insight into a company's profitability and is often used to compare the financial performance of similar companies within the same industry. It forms a basis for assessing a company’s ability to generate profit relative to its share price, making it a vital metric for investment decisions.

The other alternatives do not represent what EPS measures. Total dividends paid per share focuses specifically on the distribution of profits rather than profitability itself. The total assets divided by liabilities reflects a company’s liquidity or solvency, not its earnings. The overall market share of a company pertains to its sales relative to the industry, rather than its earnings on a per-share basis. Therefore, EPS distinctly addresses the measure of net income per share of common stocks, making it a fundamental concept in