Earnings per share (EPS) : calculation and analysis

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.   

Definition of Earnings Per Share (EPS)

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.   

How to calculate EPS

EPS of a company = Net profit / Number of shares in its share capital

  • Net profit is a figure that is easily found in a company's accounts : it is a positive result after tax mentioned in the income statement. In the case of a group, the EPS is calculated from the consolidated profit. 
  • A share represents a portion of the share capital of a company. The share gives the holder the right to vote at general meetings and the right to receive a dividend, i.e. a share of the profit. In the event of a loss, the holder of the share does not receive a dividend. 

Evaluating the number of shares a company holds

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.   

Calculation of past and future EPS

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.  

How to Interpret Earnings Per Share

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 :

  • monitoring of a company's performance. 
  • an indication of the theoretical valuation of the company on the stock market (taking into account net income).
  • comparison of prices and earnings potential of different stocks and identification of the most profitable companies (taking into account EPS of other companies)

Interpreting a sudden drop in EPS: Profit Warning

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 : 

  • favourably in the event of an increase in EPS
  • in a downward trend in the event of a decline in EPS. This is known as a "Profit Warning". 

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.    

Evaluating P/E through EPS

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.