This week's expert is Ben Yearsley
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BBC News Online's Ask the Expert column gives readers a chance to get their financial questions answered by experts.
This week, Ben Yearsley, investment research manager at independent financial adviser Hargreaves Lansdown will help reader Peter Burns understand the meaning of Earnings Per Share (EPS), a term often used by pundits and investment analysts.
Mr Burns would also like to know what is taken into account in measuring it and what can influence the calculation of an EPS.
Ben Yearsley, investment manager at Hargreaves Lansdown:
EPS is often talked about both in articles about the stock market and in news bulletins.
The best way to explain what it actually means is to give an example using a fictional company.
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DO YOU HAVE A QUESTION?
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Company X has 10 million shares in issue that currently trade at £1 per share.
Last year it made £1,000,000 profit. Using a very simple calculation of £1,000,000 (the profit) divided by 10,000,000 (the shares in issue) shows that each share in existence has £0.l0 or 10 pence in profit attributed to it.
Therefore, the earnings for each share in issue are 10 pence - therefore the EPS is 10p.
Turning it around another way the P/E of the company is 10. This is the current market capitalisation divided by the total profit (i.e. £10,000,000 divided by £1,000,000).
In other words you would have to earn that level of profit each year for the next 10 years to equal what you would have to pay for the business today.
EPS is a direct relationship between profit and number of shares in issue.
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EPS: IN SUMMARY
A direct relationship between profit and number of share in issue.
It tells shareholders how much profits the business is making.
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Calculating the earnings per share figure is normally done after all expenses in the running of the business, interest on loans and taxation have been taken into account.
Basically, what profit the managers of the business are getting for the shareholders, who are the owners of the business, after all the costs of running it.
This should not be confused with dividend per share which is what is getting paid to shareholders in cash. This will often be much lower.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.
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