In theory this is a simple concept. If Company A has earnings of £1 million and has 5 million shares in issue then the earning per share is £0.20. However there are some complicating factors.

The fact is that companies have great flexibility in how they choose to report earnings per share. There are numerous variations to the common formula used and various regulations that enable companies to choose the EPS they report. Most companies choose to report EPS according to generally accepted accounting principles (GAAP). This type of EPS, referred to both as GAAP EPS and reported EPS, is not the best indicator for investment potential, since companies can include one-time events such as the sale of a large division to inflate earnings. Another type of EPS, known as pro-forma or ongoing EPS, excludes such one-time earnings in order to estimate as closely as possible earnings from core operations.

International Accounting Standards Board has recently issued a consultation paper of 106 pages to try and find a way to agree one standard way of defining “earnings”. Until and unless that happens whilst EPS is a good indicator of how well a company is doing unless you are able to extrapolate a standard “earnings per share” figure from the published accounts yourself, you should treat the published EPS with caution.