Final answer:
Investors use Earnings per Share (EPS) to evaluate a company's potential earning power, as it directly relates to a company's profitability and is a key driver of investment decisions.
Step-by-step explanation:
Earnings per Share:
To evaluate a company's potential earning power, investors can use Earnings per Share (EPS). This financial ratio indicates how much money a company makes for each share of its stock and is a widely used indicator of a company's profitability. Factors like the Current ratio, Debt to owner's equity ratio, and Asset to liabilities ratio are important for assessing a company's financial health and solvency but are not direct measures of earning potential like EPS.
EPS is calculated by taking the company's net profit and dividing it by the number of outstanding shares of its common stock. A higher EPS suggests that a company is more profitable and has more earnings available to pay out to shareholders or to reinvest in the business. By comparing the EPS of different companies, or the same company over multiple periods, investors can gauge the growth in the company's profitability and make informed investment decisions.