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Earnings per share (EPS)

Earnings per share is net profit divided by the total number of shares and shows the profit attributable to each share. EPS scales company profit down to the investor level: it tells a shareholder what portion of the company’s profit belongs to each share.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • It is the denominator of the P/E ratio and an indicator of dividend capacity.
  • Year-on-year EPS growth is the basic condition for a share to gain value.
  • bonus issues increase the share count and lower EPS, so the historical series must be adjusted.

Formula / calculation

EPS = Net profit attributable to the parent / Weighted average number of shares. Annualised EPS is the sum of the last four quarters. Diluted EPS also includes the potential effect of convertible bonds and options.

Interpretation

Year-on-year EPS growth is the basic condition for a share to gain value. Since Price / EPS = P/E, a rising price with flat EPS means the share is becoming more expensive.

Pitfalls

bonus issues increase the share count and lower EPS, so the historical series must be adjusted. One-off profits inflate EPS. Buyback programmes reduce the share count and lift EPS without profit growth.

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Frequently asked questions

Earnings per share is net profit divided by the total number of shares and shows the profit attributable to each share.

EPS = Net profit attributable to the parent / Weighted average number of shares. Annualised EPS is the sum of the last four quarters. Diluted EPS also includes the potential effect of convertible bonds and options.

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