How do companies typically use earnings per share (EPS)?

Earnings per share (EPS) is a crucial metric that companies use primarily to attract investors and enhance shareholder value. EPS measures the profitability of a company on a per-share basis and is calculated by dividing net income by the total number of outstanding shares. By presenting a higher EPS, a company signals its ability to generate profit relative to its equity, which can positively influence investor perceptions and decision-making.

When a company's EPS is strong, it often leads to an increase in the stock price as investors are more likely to buy shares, perceiving the company as financially healthy. This phenomenon can create a positive feedback loop where rising stock prices enhance shareholder value, attracting further investment.

In contrast, while companies may consider earnings for various financial analyses, they do not use EPS specifically to compute tax obligations or to assess total company revenue. Also, although EPS can indirectly influence the market price of shares through investor sentiment, it is not a direct measure used to determine share prices. The holistic understanding of EPS’s role in promoting attractiveness to investors underscores its importance in corporate finance and investment strategies.