The ins and outs of earnings per share

Fsp Invest, 04 Nov. 2013

Tags: earnings per share, eps, headline earnings per shares, heps, what is earnings per share, what is headline earnings per share, financial ratio, investing,

If you’ve ever looked through a company’s financial reports or read an article about a company’s latest results, you’ll have seen the term earnings per share. And if that’s not enough, there’s headline earnings per share too! But what exactly do these terms mean? Read on to discover the ins and outs of earnings per share...

When it comes to company financial results, earnings per share and headline earnings per share are important, Gareth Stokes in Fear, Greed and the Stock Market explains…

Analysts and investors are very interested in these two figures. They are measures of profit.

Earnings per share (EPS)

Once the net profit is determined, a company simply divides this net profit by the number of shares in issue. This is earnings per share (EPS).

This number tells you how much each individual share earned in the year under review.

Say a company reports EPS of 5c a share. If you own 5,000 shares, the earnings on your shares amounts to R250 (R0.05 x 5,000 shares).

When you look at EPS, you want to see consistent growth. If not, you’ll have to try and establish why this number isn’t growing.

Headline earnings per share (HEPS)

Why would a company need earnings per share AND headline earnings per share (HEPS). Isn’t this a case of overkill?

The introduction of this form of earnings measurement was to strip out various ‘non-earnings’ related numbers from company earnings.

Essentially, HEPS account for all the profits and losses from operational, trading and interest activities that have discontinued or the company acquired at any point during the year. But the figure excludes profits or losses associated with the sale or termination of discontinued operations, fixed assets or related businesses, or from any permanent devaluation or write off of their values.

This may sound like a lot to digest, but to simplify, the function of HEPS is to give you a true reflection of the profitability of a business.

In South Africa, HEPS is the measure analysts and investors use to measure a company’s profitability.

So there you have it, the ins and outs of earnings per share.

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