Ratio analysis is one of the instruments used for measuring financial success of companies.

In
fact, ratios simply reveal important realities about the results of operation and financial situation
of companies and present the information to the users. Investors and stock holders care about
market price per share of companies and the ratios showing it [ CITATION Tra11 \l 1033 ]. Most of
these ratios are based on current market situations. Generally, market ratios are the ones used for
investment decisions and long-term planning. The ratios include earning per share,
price/earnings ratio, dividend per share, dividend payout and dividend yield (Saiedi, 2007).
Earnings per Share is generally considered the most important factor to determine share price
and firm value. The main objective of this academic survey is to find out the affects of earnings
per share that reflects in the share price movement and to what extent earning per share are used
to determine the performance of firms.
What are Earnings Per Share:
The term earnings per share represents the portion of a company's earnings, net of taxes and
preferred stock dividends, that is allocated to each share of common stock. The figure can be
calculated simply by dividing net income earned in a given reporting period (usually quarterly or
annually) by the total number of shares outstanding during the same term. Because the number of
shares outstanding can fluctuate, a weighted average is typically used (Besely 2006, P.20).
How It Works/Example:
Generally, earnings per share measures the portion of a corporation’s profit allocated to each
outstanding share of common stock. Many financial analysts believe that earnings per share is
the single most important tool in assessing a stock’s market price. A high or increasing earnings
per share can drive up a stock price. Conversely, falling earnings per share can lower a stock’s
market price. earnings per share is also a component in calculating the price-to-earnings ratio
(the market price of the stock divided by its earnings per share), which many investors find to be
a key indicator of the value of a company’s stock. (Besely 2006, P.20) For example, assume that
a company has a net income of $25 million. If the company pays out $1 million in preferred
dividends and has 10 million shares for half of the year and 15 million shares for the other half,
the earnings per share would be $1.92 (24/12.5). First, the $1 million is deducted from the net
income to get $24 million, then a weighted average is taken to find the number of shares
outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).
To what Extent can it Measure Organizational Performance.
Most analysts believe that a consistent improvement in earnings per share year after year is the
indication of continuous improvement in the earning power of a company. earnings per share is a
key profitability measure that both current and potential common stockholders monitor. Its
importance is accentuated by the fact that generally accepted accounting principles requires
public companies to report earnings per share on the face of the income statement of a company.
This is the only ratio that requires such prominent reporting [ CITATION Col08 \l 1033 ]. In fact,
public companies are required to report two different earnings per share amounts on their income
statements—basic and diluted. Therefore, the analysis hereunder illustrates the calculations of
basic earnings per share and diluted earnings per share. which involves the consideration of all
securities such as stocks and bonds that could potentially dilute, or reduce, the basic earnings per
share.

Analysis

For example, the cost behavior of Shoprite was analyzed over a five-year period from 2007 to
2012, using changes in turnover and operating costs, in order to estimate variable cost and fixed
cost components. the earnings per share of Shoprite for 2011 was determined at 507.60 ngwee
and at 608.13 ngwee for 2012. The actual growth in earnings per share was recorded as 19.8%.
However, given the retained income of R1 281 million in 2011, and considering the assumption
of a constant capital structure, an additional R261.9 million can be borrowed. The total
additional capital of R1 542.9 million multiplied by the adjusted asset turnover of 11.343, yields
an amount of R17 500.7 million in additional sales projected for 2012. Based on this projection
of increased sales volume, a projected earnings per share of 658.14 cents is calculated. After
adjustments are made for inflation, the projected earnings per share for 2012 is determined as
696.12 cents. When the actual earnings per share for 2012 of 608.13 cents is compared to the
projected 696.12 cents and the difference is divided by the 2011 earnings per share of 507.60
cents, it indicates that the company actually underperformed the projected earnings per share by
17.34% (of the 2011 earnings per share).
Conclusion
In conclusion, the analysis indicates that 7.48% of the actual earnings per share growth can be
attributed to inflation. The retained income of 2011, combined with the additional long-term
debt, should have enabled the company to generate more sales and earnings in 2012, contributing
to an increase of 24.21% in EPS, without taking into account the impact of leverage. Shoprite,
having low levels of fixed cost and interest, has low levels of leverage and therefore the impact
of these on the earnings per share growth is limited. It is estimated that operating leverage should
cause earnings per share growth to increase by 5.28% and that financial leverage contributes
only 0.94% to the earnings per share growth. The additional interest on the increased long-term
loans has an insignificant impact of -0.78% on earnings per share growth and the remaining
-17.34% represents the “excess” earnings per share growth the company was (not) able to
generate over and above the additional capital invested, inflation and the impact of leverage.
Shoprite actually underperformed the projected benchmark by 17.34%.
References
Associates, T. C. (2011). Understanding Invoice Financing. New York: Trans Capital Associates Media.

Besely. (2006, April 15). Financial Instruments. pp. 20-23.

Clark, J. (1971). By - products - Encyclopaedic! of Social Science - Volls- III and IV. New Jersey: ERA
Seligman.

Drury, C. (2008). Cost and Management Accounting. Handover Hemsphire UK: Cengage Media.

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