What it means
Company totals are hard to compare. A business earning $50,000,000 with 100,000,000 shares gives each share a very different slice from one earning the same amount with 5,000,000 shares.
Expressing figures per share puts all companies on the same footing from the point of view of an owner. Common per-share measures include earnings per share, dividends per share, book value per share and cash flow per share.
Each takes a company total and divides it by the number of shares, and each answers a slightly different question about what a single share is entitled to. Share prices are quoted per share, so these measures can be compared directly with the price to produce ratios such as the price-to-earnings ratio.
The denominator needs thought. For earnings per share, companies use the weighted average number of shares outstanding during the year, because shares issued part way through the year only contributed for part of the period.
They also report a diluted figure that assumes options and convertible securities are exercised. A per-share basis also explains why events such as share splits and buybacks matter.
In a two-for-one split the number of shares doubles and every per-share figure halves, so prior years must be restated to keep the trend meaningful. A buyback reduces the number of shares and can lift per-share earnings even when total profit is unchanged.
The nuance is that per-share numbers can flatter or hide performance. Growth in earnings per share may come from shrinking the share count rather than from running the business better, so it is wise to look at the totals alongside the per-share figures.
In practice
Real-world examples.
Example
An analyst compares a small software firm earning $9,000,000 with a large manufacturer earning $90,000,000. On a per-share basis the small firm earns $3.00 per share and the manufacturer $2.25, so the smaller company is more profitable for each shareholder. The analyst still checks the share prices to see which stock is cheaper per dollar of earnings.
Example
A utility company announces a dividend of $0.80 per share. A retired investor who owns 5,000 shares multiplies the two to see that she will receive $4,000 for the year.
Example
A retailer carries out a two-for-one stock split. Its reported earnings per share fall from $4.00 to $2.00 in all comparison tables, but each shareholder owns twice as many shares and is no worse off. The company restates every earlier year so that growth rates remain comparable.
Formula
Calculation
Earnings per share = net income available to ordinary shareholders / weighted average shares outstanding
Suppose a company reports net income of $6,000,000 and has 4,000,000 shares outstanding throughout the year. Earnings per share = 6,000,000 / 4,000,000 = $1.50. If it pays total dividends of $2,400,000, dividends per share = 2,400,000 / 4,000,000 = $0.60. The payout ratio is 0.60 / 1.50 = 40%, so the company keeps 60% of earnings in the business.Case study
Seen in the real world.
Summit Foods is an illustrative, fictional listed company whose net income stayed flat at $20,000,000 for two years. In year one it had 10,000,000 shares, giving earnings per share of $2.00.
During year two the board spent $30,000,000 repurchasing 1,000,000 shares, leaving 9,000,000 in issue. Earnings per share rose to 20,000,000 / 9,000,000 = about $2.22, an increase of 11% even though the business earned no more profit.
The finance director told the board that the improvement was real for shareholders but came from capital allocation rather than operations, and the illustrative lesson is that per-share figures must be read alongside the company totals to understand where the change came from. The analyst added a note to the investment memo comparing earnings per share growth with growth in total net income. Seeing the two side by side made it clear how much of the improvement came from the smaller share count.
Watch out
Common mistakes.
- Comparing per-share figures between companies without noticing that their share prices and share counts are on different scales.
- Using the year-end share count instead of the weighted average when calculating earnings per share.
- Forgetting to restate prior-year per-share figures after a split, so that the trend appears to show a collapse.
Questions
People also ask.
Why do companies report diluted earnings per share?
Options, warrants and convertible securities could increase the number of shares, so the diluted figure shows what earnings per share would be if they were all converted.
Can per-share earnings rise while total profit falls?
Yes, if the company buys back enough shares the per-share figure can increase even when total profit is lower.
Is a high per-share figure always better?
No, a company with a high figure may simply have few shares, and the comparison only makes sense alongside the share price.
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