Earnings per share

The earnings per share ratio is considered to be an important measure of corporate performance and is normally required to be shown in the published profit and loss account for a business:

Alternatively it can be explained as the net profit attributable to each ordinary share in issue. When preference shares have been issued the preference dividend is subtracted from the profit after interest and tax. The more equity increases, in terms of the number of shares issued, the greater the dilution of the earnings per share. This would indicate that additional funding from loan sources would serve to improve the resulting earnings per share value. Although this is true, it should be remembered that loan finance carries its own risks, associated with the commitment to pay interest and the repayment of the capital sum. Increases in earnings per share can be achieved by reinvesting annual earnings to achieve an increase in profit without the requirement for additional shares to be issued.

Earnings per share tends to reflect the degree of profit stability experienced by organizations. Therefore, in the case of businesses with high operating leverages, fluctuating demand and resultant profit instability, such as hotels, earnings per share is inclined to be relatively volatile.