Earnings per share (EPS) are presented in the annual accounts of listed companies, in accordance with the IFRS. They’re calculated as follows : Net profit / Number of financial shares. EPS is an indicator of the financial health of a company: an increasing EPS indicates that the share's earnings should increase. This may vary depending on the allocation of earnings and the vision of management teams.
EPS is always analysed according to its context and over time. Here is how to interpret it precisely.
Earnings per share (EPS) is the ratio between a company's net profit and the number of shares that make up its share capital. Listed companies are required to present their EPS in their annual accounts in accordance with IFRS (International Financial Reporting Standards, ie the standards applicable to the accounting of companies listed on the European market). Note that in the event of a negative result (loss), a Net Loss Per Share is not calculated and this data is annotated "not significant" in the presentation of the accounts.
EPS of a company = Net profit / Number of shares in its share capital
It is not always easy to know how many shares a listed company holds, as the actual number may differ from the number of shares listed on the official stock exchange. To be accurate, you should include any preferred shares and investment certificates. You can also calculate a diluted EPS by adding potential shares to the actual shares: derivatives, stock option plans, convertible bonds.
EPS is measured on the basis of past or current year data, but many investors anticipate future EPS based on companies' financial targets and forecasts, as well as on the recommendations of stock market analysts. These projections are obviously uncertain.
Earnings per share increase when net income increases. It decreases when net income decreases. In fact, when the EPS growth rate goes up, it means that the profit per share is getting higher and higher and that the dividend should normally increase (unless the company decides to use its profit for purposes other than dividend distribution: reinvestment, strengthening of equity capital, etc.).
In this context, EPS enables :
A company that announces an unexpected drop or increase in its EPS, either during the year or at the end of the year, influences stock prices :
It is important to note that a sudden drop in EPS does not necessarily mean that the company's value is falling: it may be due to an event such as a merger-acquisition, a capital increase, etc.
This leads to an increase in the number of shares to be remunerated. This is known as a dilution or accretion phenomenon.
Note : EPS is also the basis for calculating P/E- Price Earning Ratio - an indicator used by investors to assess the price level of a share in relation to the market.
More precisely, the P/E measures the number of years it would take for an investor to recover the amounts invested in the shares thanks to the profit of these securities. It is used to determine whether a stock is "expensive" or not.
P/E = Share price / EPS
In conclusion, earnings per share (EPS) is an interesting indicator when analysed in relation to past EPS (known as rolling EPS) or in relation to the EPS of other companies. It shows the financial health of a company and its profitability prospects and can help evaluate whether an investment is profitable or not.
