Earnings per share and return on equity

Overview

Earnings per share and return on equity with worked calculations, the effect of share issues and gearing, dividend per share, and why these ratios suit companies.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What do shareholder earnings ratios measure?

   Model answer

   Shareholder earnings ratios measure the return a company generates for its owners. Investors use them to compare shares and judge performance.

2. 2

   State the formula for earnings per share.

   Model answer

   Earnings per share equals profit after tax divided by the number of ordinary shares issued. EPS is usually given in pence per share.

3. 3

   A company has profit after tax of £360,000 and 1,200,000 ordinary shares. Calculate its earnings per share.

   Model answer

   The earnings per share are 30p. The working is £360,000 ÷ 1,200,000 = £0.30, which is 30p.

4. 4

   What does a rising earnings per share figure indicate?

   Model answer

   A rising EPS shows the company is earning more profit for each share. Investors usually see a rising EPS as a sign of improving performance.

5. 5

   Why can a share issue reduce earnings per share even when profit rises?

   Model answer

   The profit is shared across more shares, which dilutes earnings per share. EPS falls if profit grows more slowly than the number of shares.

6. 6

   A company's profit after tax rises from £360,000 to £390,000, while its shares rise from 1,200,000 to 1,500,000. What happens to earnings per share?

   Model answer

   Earnings per share fall from 30p to 26p. The working is 360,000 ÷ 1,200,000 = 30p and 390,000 ÷ 1,500,000 = 26p.

Other ways to work this

The same content, four other ways.

What is inside Levo

Six ways to work the same material.