EPS

EPS divides a company's net income for a period by the number of its shares and so shows how much profit has been earned per share outstanding. The metric converts absolute profit, which depends on the size of the business, into a figure comparable with the price of a single share — which is why it sits in the denominator of most price multiples.

How the numerator and the denominator are built

The numerator is not the group's entire profit but the part of it that belongs to holders of ordinary shares: the consolidated result is reduced by the non-controlling interests in subsidiaries and by the dividends due on preferred shares. The denominator is the weighted average number of shares over the period, not the balance at the reporting date: a follow-on issue or a cancellation in the middle of the year is included in proportion to the time the shares were outstanding. A buyback followed by cancellation shrinks the denominator, and EPS rises with no change in profit at all. Share splits and reverse splits are restated retrospectively across all comparative periods, otherwise the trend would become unreadable. The denominator is the entire issue, not only the shares available on the exchange, so the free float has nothing to do with the calculation.

Example: from price to earnings per share

Sberbank's P/E stands at 3,77. Since this is the ratio of the share price to EPS, working backwards gives EPS itself: we divide the share price from the card above by the value of the multiple. The same EPS can be obtained by dividing net income — 491 000 000 000 — by the bank's weighted average number of shares; the result will match if the market capitalisation and the profit are taken for one and the same period.

Where EPS is misleading

Comparing the EPS of two companies with each other is meaningless: the number of shares is an arbitrary quantity that depends on the history of splits and on par value, not on the quality of the business. The correct approach is to look either at the EPS trend of a single stock or at its ratio to the price. The second distortion is one-off items: the sale of an asset, a property revaluation or a currency effect lifts quarterly EPS without changing anything in operations, which is why normalised earnings are used to compare periods. When there is a loss, EPS is negative and the price multiples built on it lose their meaning — in that situation investors rely on P/S or EV/EBITDA. Finally, EPS growth achieved by shrinking the denominator is not the same as growth in profitability: what is happening to the return on equity is answered by ROE.