Certified Valuation Analyst (CVA) Practice Exam

What does earnings per share (EPS) represent in a company's financials?

1. The total market value of a company's shares

2. The net income less preferred stock dividends divided by the number of common shares outstanding

3. The net earnings divided by total assets

4. The net income divided by total liabilities

The correct answer is: The net income less preferred stock dividends divided by the number of common shares outstanding

Earnings per share (EPS) is a key financial metric that illustrates the profitability of a company on a per-share basis. Specifically, it is calculated by taking the net income of the company, subtracting any preferred stock dividends, and dividing this figure by the average number of common shares outstanding during a specific period. This calculation provides a clear measure of how much profit is attributable to each share of common stock, making it a valuable tool for investors to assess the company's financial performance and profitability. In the context of the other options, it's important to understand that the total market value of a company's shares focuses more on market perception rather than direct profitability (as described in the first choice). The third option, which divides net earnings by total assets, gives a ratio that reflects asset efficiency rather than profit attributable to shareholders. The fourth option, which divides net income by total liabilities, measures different aspects of financial health rather than the return per share. Therefore, the fundamental nature of EPS directly correlates to shareholders' interest in the company's profitability on a per-share basis, validating B as the correct answer.