When a company reports its results, one figure tends to grab the headlines more than any other: earnings per share, usually shortened to EPS. It is often the number that decides whether a share jumps or slides on results day, so it is worth understanding what it measures and where it can mislead.
The basic calculation
Earnings per share is a company’s profit divided by the number of shares it has in issue. If a business makes £100 million in profit after tax and has 50 million shares, its EPS is £2. In other words, each share is entitled to £2 of that period’s profit, whether or not the company actually pays it out as a dividend.
The profit figure used is normally the profit left for ordinary shareholders, after tax, interest and any payments owed to preference shareholders. That makes EPS a way of shrinking a large, abstract profit number down to something an individual shareholder can relate to.
Basic and diluted EPS
You will often see two versions. Basic EPS uses the shares currently in issue. Diluted EPS also counts shares that could be created in future, for example from employee share options or bonds that convert into shares. Because diluted EPS spreads the profit over more shares, it is usually a little lower. Many analysts prefer it because it gives a more cautious picture.
Reported and adjusted figures
Companies also frequently publish an adjusted or underlying EPS that strips out items they consider one-off, such as restructuring costs, legal settlements or write-downs. That can be helpful when a genuine one-off event distorts the picture. It can also flatter results if a company treats costs as unusual year after year. It is worth comparing the adjusted number with the statutory figure and reading why the two differ.
Why the market reacts to EPS
On results day, the market rarely judges EPS in isolation. What matters is how it compares with expectations. Analysts publish forecasts, and the average of those forecasts is known as the consensus. A company that beats consensus can see its shares rise, while a miss can send them lower, even if profits have grown strongly compared with last year.
The guidance a company gives for the months ahead often matters just as much. A strong quarter followed by a cautious outlook can still disappoint. With the big US banks due to start the next reporting season soon, our guide to how bank earnings season works explains why the first reports set the tone.
EPS and valuation
EPS is also the foundation of the price-to-earnings ratio, which compares a share price with the company’s earnings per share. If a share trades at £30 and EPS is £2, the P/E is 15, meaning investors are paying 15 times one year’s profit. Our explainer on the price-to-earnings ratio covers how to read that figure.
Where EPS can mislead
Because EPS depends on the number of shares, it can rise even when total profit does not. If a company buys back its own shares, there are fewer shares to divide the profit between, so EPS goes up. That is not necessarily a bad thing, but it is different from the business genuinely growing. Our guide to share buybacks explains the debate.
EPS also says nothing about cash. Profit is an accounting measure, and a company can report healthy earnings while struggling to turn them into cash. Debt levels, the quality of revenue and the strength of the balance sheet all sit outside the EPS number.
Finally, comparing EPS between companies is of limited use on its own. A company with EPS of £5 is not automatically better than one with EPS of 50p. Share counts and prices differ, which is why ratios such as P/E exist.
Using it sensibly
Earnings per share is a useful starting point for understanding how profitable a company is for each shareholder and how results compare with expectations. It works best as one piece of a wider picture that includes cash flow, guidance and valuation.
If you would like to understand how company results fit into a structured trading approach, our free trader assessment is a sensible next step and highlights where to build your knowledge.
