Earnings per share

A company's profit for a reporting period, divided by the number of ordinary shares in issue over that period, so the result is an amount of money attaching to one share. Stating profit per share is what makes two companies of different sizes comparable, and it is the figure most valuation measures are built on, because a price per share divided by earnings per share gives a price to earnings ratio.

Basic earnings per share uses profit after tax attributable to ordinary shareholders, divided by the weighted average number of shares in issue across the period rather than the count on the closing day. Diluted earnings per share repeats the calculation with the share count that would exist if options, convertible instruments and similar claims were exercised, so the diluted figure is the lower of the two and is the more conservative reading. Because the divisor is a share count, a buyback lifts earnings per share while profit is unchanged, and an issue of new shares lowers it on the same logic.

The usual confusion is between the reported figure and an adjusted or underlying one. Adjusted earnings per share strips out items a company's management considers non-recurring, and the choice of what counts as non-recurring is the company's own. Analysts disagree about it in both directions: one view is that adjusted figures reveal the trend an accounting standard obscures, the other that recurring adjustments are not one-off at all. A second confusion is that the price reaction to a result tends to follow the surprise against the consensus estimate and the outlook given alongside it, rather than whether earnings per share rose.

A contract for difference written on a share carries no entitlement to earnings of any kind. Earnings per share reaches such a contract only through the exchange price of the share, which the contract references.