Earnings per Share (EPS) = Earnings / Number of Shares in Issue
A P&L tells you what a company has achieved in the past, which is fine, but investors are interested in what it can do in the future. The most popular tool for that is to examine the trend of its EPS. Earnings are the profits after tax - they pay for dividends to shareholders and fuel future growth. Ideally, they should show smooth consistent growth.
Example
Goodco makes a post-tax profit of £1.2 million. There are 20 million shares in issue. EPS = £0.06
What starts out as an easy calculation gets complicated because the rules on what constitute earnings are fuzzy, especially when it comes to 'one-offs'.
Until recently companies had discretion about how they treated one-offs. They could call an unusual profit 'exceptional' and include it in their EPS, and call an unusual loss 'extraordinary' and exclude it from EPS. This made it very difficult for investors to gauge the true progress of the business.
Various Financial Reporting Standards (FRS) have tried to regularise treatment of one-offs, but if anything have made analysis harder. Large companies now report EPS in different ways, and the challenge for investors is knowing what basis has been used. When newspapers report EPS they use 'adjusted' EPS (also known as 'headline earnings') which strips out all profits/losses attributable to non-core activities.
The basic rule for you as an investor is to seek out companies that produce steady growth in EPS.
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