The earnings per share (EPS) ratio is effectively a restatement of the return on equity (ROE) ratio.
While the ROE ratio is calculated as a percentage, taking total net profit and total equity into consideration, the EPS ratio shows how much profit has been earned by each ordinary share (common share) in the year.
Net profit attributable to ordinary (common) shares is arrived at by deducting corporation tax and preference dividend from the amount of net profit earned in any particular year.
The following information was extracted from the balance sheet of John Trading Concern at the end of a financial year:
- Profit before tax: $480,000
- Corporate tax: 50%
- 8% preference shares capital: $200,000 (20,000 preference shares at $10 each)
- Ordinary share capital: 800,000 (80,000 ordinary shares at $10 each)
Required: Calculate John Trading Concern’s earnings per share (EPS) ratio.
Earnings per share (EPS) ratio = $224,000*/80,000 shares
* Net profit attributable to ordinary shareholders = 480,000 – 240,000 – 16,000
The earnings per share (EPS) ratio is 2.8. This means that each ordinary share (common share) of the company earns $2.80 during the period.