Table of Contents

Earnings per share ratio is effectively a restatement of return on equity (ROE) ratio. While return on equity ratio is calculated as a percentage, taking total net profit and total equity, earnings per share ratio shows how much profit has been earned by each ordinary share (common share) in the year.

## Formula

Net profit attributable to ordinary (common) shares is arrived at by deducting corporation tax and preference dividend from the amount of net profit earned in any particular year.

## Example

The following information has been extracted from the balance sheet of John Trading Concern at the end of an year:

Profit before tax: $480,000

Corporate tax: 50%

8%Preference shares capital: $200,000 (20,000 preference shares of $10 each)

Ordinary share capital: 800,000 (80,000 ordinary shares of $10 each)

You are requested to calculate earnings per share ratio of John Trading Concern.

### Solution

Earnings per share (EPS) ratio = $224,000*/80,000 shares

= 2.8

*Net profit attributable to ordinary shareholders = 480,000 – 240,000 – 16,000

= $224,000

The earnings per share ratio of John trading company is 2.8 which means each ordinary share (common share) of the company earns $2.8 during the period.