When a board of directors running a listed company update investors on the performance and progress of the company, of particular importance is its earnings figure – writes Christian Leeming

 
Sometimes known as the ‘attributable profit’, the company’s profit after tax is the amount it has made on behalf of its shareholders.

Dividing this profit figure by the number of shares the company has issued calculates the earnings per share (EPS) which is of great significance to market watchers; analysts compare the earnings per share of companies across a sector and attempt to weigh a company’s share price against predicted future earnings.

Analysts look for a company to generate cumulative earnings per share equivalent to its current share price over a selected period of time.

Thus the target for a share trading at 250p will cumulatively be £2.50 earnings per share over x years; this figure is adjusted to reflect the fluctuating cost of any borrowing a company may have to make in order to achieve this performance, and the certainty, or otherwise of a company achieving its revenue targets.

‘The single biggest factor in moving a share price up or down is when a company announces that its future profits are now expected to be higher, or lower’

The single biggest factor in moving a share price up or down is when a company announces that its future profits are now expected to be higher, or lower, than had previously been predicted, thus making its cumulative EPS target more or less achievable.

There can be other factors that may move a share price such as regulatory issues leading to punitive fines or a weakening of a company’s long term prospects.

Shares in companies specifically constituted as investment vehicles such as OEICs or investment trusts can also be forced down for reasons other than the performance of the company when, for example, the exit of a large number of customers forces the fund to sell assets that may otherwise be expected to deliver good future returns.

Large institutional investors such as asset managers, pension funds or insurance companies can also affect the price of a particular stock by selling off large holdings, often creating problems in terms of liquidity and depressing a share price for a protracted period of time.

The converse may also occur when demand for a stock outstrips supply.





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