How is earnings per share (EPS) calculated?

• A. Total sales divided by outstanding shares
• B. Net earnings divided by total shares outstanding
• C. Gross income divided by liabilities
• D. Net profits divided by equity

Answer: (B)

Earnings per share (EPS) is calculated by taking the net earnings of a company and dividing it by the total number of shares outstanding. This metric provides a clear indication of a company's profitability on a per-share basis, which is crucial for investors when evaluating a company's financial performance.

EPS is a key indicator used in financial analysis and stock valuation because it reflects the earnings attributable to each share of common stock, allowing for straightforward comparisons among companies of different sizes and across industries. By using net earnings in this calculation, the EPS provides a snapshot of the portion of a company's profit that can be distributed to shareholders, thereby helping investors assess operational efficiency and profitability.

The other options presented don't accurately represent the EPS calculation or measure, making them unsuitable as methods for determining earnings per share.