Ans:
Profit after tax, net profit, or profit available to equity shareholders is referred to as PAT. Due to a rise in the number of shares issued by the corporation, a company with increased profits/PAT may have a lower EPS than previous results. A rise in the number of shares may be due to the issuance of bonus shares, the splitting of shares, the exercising of stock options, or the issuance of new equity shares.
Earnings per share, or EPS, is a key indicator that investors, shareholders, and analysts monitor. PAT is divided by the number of shares to arrive at this figure. Because the denominator represents the number of outstanding shares, any decrease in that number, even a slight increase in the numerator, can have an inverse effect on the EPS.
Example:
In the first year, a firm with a PAT of ₹ 100 crore has 10 crore outstanding equity shares. In this situation, the EPS would be 10.
In year 2, the PAT rises to ₹ 120 crores and the company issues a bonus issue in the ratio of 1:1, bringing the total number of shares outstanding to 20 crores. The EPS in this situation is 6.
As a result, we can see that an increase in the number of shares has an impact on the EPS, even though the company's PAT levels have increased.