Earnings per share is seen as one of the best means of determining a share’s true price, as it shows how much of a firm’s profits (after tax) each shareholder owns.
It is calculated by dividing a company’s net earnings by the number of shares issued, and is most often used as a means of comparing one company with another, assuming that they are in the same industry. So if a company had net earnings of £1,000 with 200 shares issued, it would have an EPS of five.
By looking at the EPS over several years you can look for a growth pattern and compare it with the market and industry.
• See Tim Bennett’s video tutorial: Beginner’s guide to investing: earnings per share.