What does Earnings Per Share (EPS) represent?

Earnings Per Share (EPS) is a key financial metric that provides insight into a company's profitability on a per-share basis for common stockholders. It is calculated by dividing the net income of a company by the average number of outstanding shares of its common stock during a specific period, typically a fiscal quarter or year.

This measurement is particularly important to investors, as it indicates how much profit is allocated to each share of common stock, allowing for comparisons across companies and over different time periods. A higher EPS suggests greater profitability and is often a sign of a good investment opportunity, as it indicates that the company is generating more income for its shareholders.

Other options do not accurately represent the definition of EPS. For instance, net income divided by total assets depicts return on assets, and net income divided by net sales relates to profit margins. Similarly, net income divided by retained earnings does not provide a meaningful metric for assessing earnings per common share, as retained earnings are cumulative and reflect past profits that have been reinvested in the business rather than distributed to shareholders. Thus, EPS specifically focuses on net income allocated to each share of common stock, making it a critical indicator of financial health and performance.