There are many different ways to compare businesses or to judge how well a business is doing.
Investors may look at the growth of sales, net profit after tax (NPAT), net tangible assets per share (NTA) or earnings before interest, tax, depreciation and amortisation (EBITDA). There are even more metrics an investor could look at.
Everything a business does to improve profitability will flow through to the earnings per share figure.
Here are a few examples of why earnings per share is the best metric to follow:
If a company manages to increase revenue it should result in an increase in earnings per share. The revenue growth could have come about because of an even bigger increase in the cost of advertising, which increases total expenditure and potentially has the effect of decreasing earnings per share.
If a company increases EBITDA it should result in an increase of earnings per share. However, that growth could have come about from buying a lot of new assets with debt, which would increase the depreciation and interest cost, which could decrease earnings per share.
A company may have acquired another business and funded it through issuing more shares. This acquisition may boost the company's revenue, EBITDA and NPAT but the amount of new shares could dilute existing shareholders so much that earnings per share is less than last year's.
I think the earnings per share metric is one of the very best ways to analyse how much the company has grown its profit and worth for each shareholder and each share.
Foolish takeaway
Companies that display fast and/or consistent growth of the earnings per share are the best ones to own over the long-term. It should reflect a growth in the share price and dividend in the long-term too.
Companies like REA Group Limited (ASX: REA), Ramsay Health Care Limited (ASX: RHC) and InvoCare Limited (ASX: IVC) are all great examples of businesses that are growing their earnings per share year after year.
Another business that has achieved incredible growth over the last 10 years is our number one dividend pick for 2017.
