One of the key financial ratios adopted by financial analysts has been the price/earnings ratio (P/E ratio). It is a widely used performance indicator and is published in the Financial Times on a daily basis. If the P/E ratio starts to veer away from the 'norm' for the industrial sector concerned, analysts may well advise their fund managers to sell shares in the company, resulting in a fall in the share price of that company and its overall value to shareholders.
The P/E ratio is defined as:
In the example above it would take an investor 8 years of current earnings of 72.5 p to recover the initial investment of 580 p.
IAS 33 was published in order to clarify and standardise the calculation of the bottom line of that ratio, earnings per share (EPS), which is published at the foot of the income statement for every listed company in their annual report. This should serve to enhance comparability across listed companies. It only applies to listed companies, although if published by unlisted companies, the calculations must be the same.
Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
IAS 33 also permits the adoption of alternative EPS figures based on other versions of profits. If adopted, a listed company must reconcile...
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