Reading: Profitability Ratios

Closely related to the Return on Equity (ROE) are the firm's Earnings per Share (EPS). The ratio indicates how many dollars of net income the firm generates for each share of common stock. Put differently, it is the amount of money each share of common stock would receive if the firm distributed the full net income to its shareholders:

We generally express the number of shares outstanding on a "fully diluted" basis, that is, we assume that all options, warrants and other convertible securities to acquire shares are exercised. 

For firms with preferred stock, we have to slighly modify the above equation to compute EPS. Preferred stock is a class of shares that entitles the holder to a fixed dividend payment. Because these shares are "preferred," common stock holders only receive a dividend after the firm has paid out the dividends on the preferred stock. The modified EPS equation is:

In the case of Hershey, we know from the income statement that the 2015 net income was 513 million. From the 10-K filing we also see that the average number of shares outstanding (fully diluted) is 220.651 million. The firm has no preferred stock. Hence, the firm's fully diluted EPS in 2015 was 2.32:

For listed firms, EPS is an extremely important financial metric. Many market participants, including financial analysts, investment bankers, traders, etc. look at this measure when making decisions or recommendation. EPS is also metric of choice when we read in the newspaper about companies that exceed, meet, or miss their earnings targets.