Why does a company’s EPS falls even when the PAT rises?

By Research Desk
about 5 months ago
1

PAT means profit after tax or net profit or profit available for equity shareholders. A company having increasing profits/PAT can have a lesser EPS than the last results due to an increase in the number of shares issued by the company. Increase in number of shares may be due to issue of bonus shares or share split or stock options being exercised or issue of new/fresh equity shares.

Earnings Per Share (EPS) is an important metric tracked by investors, shareholders and analysts. It is calculated by dividing PAT by the number of shares. Since outstanding number of equity shares is in the denominator, any change in the same can inversely affect the EPS despite rise in numerator.

Example: A company having a PAT of Rs. 100 crores has 10 crore outstanding / issued equity shares in year 1. The EPS in this case would be Rs.10. In year 2, the PAT increases to Rs. 120 crores. Also, in year 2, company makes a bonus issue in the ratio of 1:1 which makes the number of outstanding shares 20 crore. The EPS in this case will be Rs. 6 for year 2. Thus we can observe that an increase in the number of shares affects the EPS despite the increase in PAT levels of the company.

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