Earnings Per Share and Investment
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Earnings per share (EPS) is the amount of net income a company earns for every share of stock held (Harrison, et al. 2013). The ratio is determined after paying taxes and dividends to stockholders (QFinance). This ratio is extremely important when comparing two companies because it allows for a direct "apples-to-apples" comparison (Little, n.d.). A high ratio demonstrates a healthy company. Companies can increase their EPS by increasing their net profits or by using leverage. Leverage is the use of borrowed money to increase the return on equity (Harrison, et al. 2013). It's like gambling with someone else's money and hoping to win more than you borrowed. The assumption is that more income will be gained by borrowing than the interest that will be owed on the debt. A company may be willing to use financial leverage to increase their EPS. Steady increases over time also paint a picture of a profitable company. The EPS is an easy calculation to help someone choose investment opportunities, or when comparing two companies, which company is the better investment. Most people are more likely to invest in companies with a track record of steady growth in its EPS (Ready Ratios, n.d.).
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Discuss the impact of leverage on Earnings per share
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Though leverage can help a company earn more, and thus increase its earnings per share, there is a limitation. The more leverage a ...
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