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”.

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