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Chapter 4. Practical Calculation of EPS and the P/E from Company Accounts

We have now covered in detail the theory of how EPS and the P/E are calculated. Now we can put this into practice using a real-life example: Haynes Publishing, publishers of the famous motor manuals. For the sake of this exercise I shall evaluate the company in mid-2011 when its share price was 255p.

Profit

Haynes’ profit last year can be found in its latest annual report, available from the investor section of its website www.haynes.co.uk.

Figure 3: Extract of Haynes’ company report – profit and loss account

The top line of the income statement is revenue, i.e. Haynes’ total revenue from publishing from 1 June 2010 to 31 May 2011.

As we saw in the previous chapter, as we move down the income statement more and more costs are deducted, starting with cost of sales and followed by distribution and administrative costs. Further details of these costs are given in the notes to the accounts. This gives operating profit of £7,687,000 finance costs (loan interest) are then set against finance income (interest earned on cash and investments) to give profit before tax of £7,177,000. Finally tax is deducted, to give profit after tax of £4,749,000. This remaining profit is that attributable to shareholders (non-controlling interests represent the portion of profits in subsidiaries that is not held by Haynes Publishing Group). It is the £4,742,000 of profit attributable to equity holders of the company that is used to calculate the EPS figure used in the P/E ratio.

EPS

We now divide the profit attributable to shareholders by the number of shares to get the historic EPS:

A weighted average has to be used because companies often issue more shares during the year as part of their executive bonus scheme. This increases the number of shares in issue and so dilutes the earnings attributable to each existing share. Large-scale fund-raising by issuing more shares is much rarer.

In fact Haynes did not issue any shares in 2011, so the weighted average is the same as the number of shares at the end of the financial year. Haynes also spares us another complication, diluted earnings per share, as there are no options outstanding to executives or employees. Haynes’ diluted EPS is 29p, the same as its basic EPS.

The company has in fact already done this calculation for us in the bottom lines of the income statement. Haynes’ EPS is 29p, but we can check the basis of the calculation in Note 9 to the accounts:

Figure 4: Extract of Haynes’ company report – earnings per share

The P/E

We can now divide the share price by the EPS to calculate the P/E ratio. In early 2012, therefore, Haynes’ P/E ratio is:

In other words, an investment of 195p per share costs about seven times’ earnings per share. This is on the low side, even for a small company, but it is still fairly near the centre of the cloud in Figure 2.