Earnings per share (EPS) ratio
Earnings per share ratio is effectively a restatement of return on equity (ROE) ratio. While return on equity ratio is calculated as a percentage, taking total net profit and total equity, earnings per share 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 has been extracted from the balance sheet of John Trading Concern at the end of an year:
Profit before tax: $480,000
Corporate tax: 50%
8%Preference shares capital: $200,000 (20,000 preference shares of $10 each)
Ordinary share capital: 800,000 (80,000 ordinary shares of $10 each)
You are requested to calculate earnings per share ratio of John Trading Concern.
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 ratio of John trading company is 2.8 which means each ordinary share (common share) of the company earns $2.8 during the period.