Change in Earnings per Share

Definition

The term change in earnings per share refers to a metric that allows the investor-analyst to understand the change in profitability relative to the prior earnings period. Earnings per share is arguably the single most important measure of a company's performance.

Calculation

Change in Earnings per Share (EPS) = Incremental Change in EPS / Prior Period EPS

Where:

  • The incremental change in earnings per share is equal to the earnings per share in the current period minus earnings per share in the prior period.
  • Prior period EPS is equal to the earnings per share in the prior accounting period and this is the baseline EPS share for this metric.

Explanation

Return on investment measures allow the investor-analyst to understand the company's ability to provide shareholders with an acceptable return on their investment. This is usually assessed by examining metrics such as net worth, returns on equity or assets, earnings, economic value added, and dividends. Return on investment metrics provide analysts with a way to determine a fair price to pay for a share of common stock. One of the ways to understand if a company is growing earnings is by calculating the change in earnings per share.

Investors in common stock are particularly interested in earnings per share, since this is a direct measure of the additional value they are deriving from a company's operations. While total earnings are also of interest, earnings per share (EPS) normalizes earnings in terms of a single share of common stock. If a company is growing profits, this effect will manifest itself as an EPS growth rate. Typically, investors would track EPS growth over longer timeframes, such as five years, to determine a true growth trend. A change in EPS is calculated by finding the incremental change in EPS and dividing it by the EPS in the prior period.

Example

A mutual fund manager would like to understand the growth rate of Company ABC's earnings per share over the last year. He asked his analytical team to calculate Company ABC's change in earnings per share in the prior year and compare it to the current reporting period. The team examined both the company's income statement over the last two years as well as the number of common shares issued by the company. The manager's team found the prior period EPS was equal to $3.52, while Company ABC's current period EPS stood at $3.75. The change in EPS could then be calculated as:

= $3.75 - $3.52 / $3.52
= $0.23 / $3.52, or 6.53%

Related Terms

economic value added momentum, economic value added, equity growth rate, financial leverage index