Why is earnings per share (EPS) also known as “The Bottom Line”?

By Jean Folger AAA
A:

Earnings per share (EPS) is often considered to be one of the most important variables in determining a stock’s value, and it comprises the “E” part of the price-earnings (P/E) valuation ratio. EPS is calculated as:

EPS = net income / average outstanding common shares

The term “bottom line” refers to a company’s net earnings, net income or earnings per share.  “Bottom line” describes the relative location of this figure on a company’s income statement: it typically is the last line at the bottom of the page; therefore, the bottom line. The figure, and being the last line on the page, reflects the fact that all expenses have already been subtracted from revenues (which appear towards the top of the page and are considered “top line” figures), and there is nothing left to subtract.

An income statement has four different components:

  • Revenue – gross receipts earned by the company by selling its goods/services
  • Expenses – costs to the company to earn the gross receipts
  • Gains – income from non-business related transactions
  • Losses – the opposite of gains, losing money when selling a company asset

The last line on the income statement is “Net income” or “the bottom line”. 

RELATED FAQS

  1. How do I use the PEG (price to earnings growth) ratio to determine whether a stock ...

    Using the PEG, or price/earnings to growth, ratio provides a better picture of a stock's valuation versus simply relying ...
  2. Are accounts receivable used when calculating a company's debt collateral?

    Learn how accounts receivables are recorded as assets on a balance sheet; they are used when calculating a company's total ...
  3. What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required ...
  4. How do ridesharing companies like Uber make money?

    Discover the services a transportation company such as Uber provides and how the premiere ridesharing company operates and ...
RELATED TERMS
  1. Primary Earnings Per Share (EPS)

    One of two methods for categorizing shares outstanding. The other ...
  2. Earnings Announcement

    An official public statement of a company's profitability for ...
  3. Price-Earnings Ratio - P/E Ratio

    A valuation ratio of a company's current share price compared ...
  4. Best's Capital Adequacy Relativity (BCAR)

    A rating of an insurance company’s balance sheet strength. Best’s ...
  5. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  6. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...

You May Also Like

Related Articles
  1. Personal Finance

    6 Things To Look For In Earnings Reports

  2. Markets

    The Most Important Metrics For Earnings ...

  3. Investing

    What Happened To Obama’s Amnesty Bill?

  4. Charts & Patterns

    The Future of Qualcomm's Stock

  5. Fundamental Analysis

    Earnings Quality, the Facebook Example

Trading Center