Earnings Per Share (EPS)

Earnings per share is perhaps the single most important measure of how well (or otherwise) the board of directors are doing for their shareholders. This measure expresses how many pence the company is earning for every share held.

The calculation is 'pre-tax profit divided by the number of shares in issue'. So, if a company makes £10 million and has 100 million shares in issue. Its 'earnings per share' is 10 pence.

Earnings per share is more important than the overall reported profit figure! The reason is that 'EPS' provides a more pure measure of profitability.

Consider this, if a company doubles its profits and at the same time quadruples the number of shares in issue, ought you as a shareholder to be pleased. The answer is no, doubling profits is terrific, but suddenly the number of shares on the market has been multiplied by four. You have actually had the value of your investment halve in value.

The above example, although a little extreme, is useful because many companies increase their profits at a spectacular rate by buying other companies and issuing new shares. So when looking at profits, look for 'eps' it'll serve you well!

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Last Updated: June 2007 © Moneyextra.com

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