Earnings principle in options
Earnings Per Share Earnings per share, or EPS, is the company's profits attributable to each outstanding share of common stock. It is one of a number of indicators used in financial analysis to assess a company's performance.
EPS is computed by taking the net income earned less dividends on preferred stock by the company during the quarter or year and divide that figure by the weighted average number of outstanding shares during that reporting term.
EPS is an important indicator of a company's performance and is often used for stock valuation purposes. For example, it is used to calculate the price-to-earnings valuation ratio.
As can be seen in the formula shown above, lowering the number of shares outstanding will increase the earnings per share. As EPS impacts stock valuation heavily, companies sometimes buy back their own shares to up the EPS number so as to increase shareholder value.
Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results