
Learn how to use Revenue Per Share (RPS) and its growth rate to assess company performance.
What is Revenue Per Share (RPS) and why is it important?
Revenue Per Share (RPS), also known as Sales Per Share (SPS), is a metric that helps investors evaluate a company’s revenue relative to its outstanding shares. Calculating RPS involves dividing the company’s total revenue by the number of shares outstanding, which includes shares held by regular shareholders, institutional investors, insiders, and company officers. By examining RPS, investors can gain insight into the company’s sales efficiency on a per-share basis, making it a valuable metric for assessing growth potential and financial health.
In this article, we’ll explore how to calculate RPS, the significance of RPS growth rate, and the impact of share adjustments like splits, consolidations, and buybacks on this metric.
Calculating RPS and understanding its significance
RPS is calculated as follows:
For example, if a company has a total revenue of £10 million and 2 million shares outstanding, its RPS would be:
This figure represents the revenue generated per share and provides a benchmark for comparing the company’s sales performance with that of its peers. A higher RPS can indicate a company’s strong sales ability, making it a useful indicator for investors. However, since RPS is a point-in-time metric, it’s essential to review it in the context of its historical trend.
Analysing RPS over time: The role of RPS growth rate
A single RPS figure offers a snapshot, but tracking RPS Growth Rate over time provides a fuller picture of a company’s sales growth. The RPS Growth Rate is typically given as a percentage over a five-year period. A positive growth rate suggests that the company’s revenue is increasing, which may indicate business expansion and potential profitability, especially if this growth rate is above inflation.
However, investors must consider any significant changes in the number of shares outstanding when interpreting RPS trends. For example, if a company has issued new shares or undergone share buybacks, the RPS calculation will be affected. Reviewing RPS Growth alongside these share adjustments helps investors assess how sustainable the company’s growth truly is.
Share splits, consolidations, and buybacks: How they affect RPS
Share splits and consolidations are common practices that companies use to adjust the price and liquidity of their shares:
- Share Splits: In a share split, a company increases the number of shares by issuing additional shares to existing shareholders. For example, in a 2-for-1 split, each share is divided into two, halving the price per share. This approach is often used to make shares more affordable to smaller investors and improve liquidity without changing the company’s overall value.
- Consolidations (Reverse Splits): In a reverse split, a company decreases the number of shares, which increases the price per share. For example, in a 1-for-2 consolidation, two shares are consolidated into one, doubling the share price. This approach is often used to increase the share price to meet stock exchange listing requirements or to reduce the number of shares available.
While these actions don’t directly impact the total value of an investment, they do affect RPS calculations. A share split will lower RPS because the revenue is divided by a higher number of shares, whereas a consolidation will increase RPS by reducing the share count.
Buybacks also affect RPS. When a company buys back its shares, it reduces the number of shares outstanding, which can increase the RPS if revenue remains stable. Buybacks are often used by companies looking to reinvest cash reserves, potentially boosting share price by reducing supply. However, if a company with declining growth initiates a buyback, it may indicate financial instability or even a potential delisting## Using the weighted average of shares outstanding
Due to the dynamic nature of share adjustments, investors may face challenges when comparing RPS over time. To minimise the impact of share splits, consolidations, and buybacks, many companies use the weighted average of shares outstanding to calculate RPS. This approach averages the number of shares throughout the reporting period, offering a more balanced view of RPS.
For instance, if a company’s share count fluctuated throughout the year due to buybacks or new issuances, the weighted average would provide a more accurate RPS by accounting for these changes. By examining the weighted average RPS over multiple years, investors can gain a clearer understanding of the company’s revenue growth trajectory.
Why RPS growth is a valuable metric for investors
RPS growth over time is one of the most reliable indicators of a company’s expanding revenue base. Companies with high or consistent RPS growth tend to be better positioned for future growth, making them attractive to long-term investors. Here’s why RPS growth matters:
- Indication of revenue strength: Positive RPS growth shows that a company’s revenue is increasing on a per-share basis, suggesting that the business is expanding and attracting more customers.
- Comparison across sectors: By comparing RPS growth rates across companies within the same sector, investors can assess which companies are outperforming others in terms of revenue generation.
- Assessment of share liquidity impacts: RPS growth takes into account changes in the number of shares outstanding, providing a metric that adjusts for corporate actions like buybacks and share issuances.
Practical considerations when using RPS in investment decisions
While RPS is a powerful metric for gauging revenue strength, it shouldn’t be used in isolation. Here are some considerations when incorporating RPS into your analysis:
- Look at RPS in combination with EPS: RPS provides insight into revenue, while Earnings Per Share (EPS) offers a view of profitability. Comparing both metrics can help investors assess a company’s efficiency in converting revenue into profit.
- Consider the impact of corporate actions: Be aware of share splits, consolidations, and buybacks that may distort the RPS figure. Always check whether the RPS metric is based on the weighted average of shares outstanding or simply uses the year-end share count.
- Review RPS growth against inflation: A positive RPS growth rate above inflation suggests genuine growth, while a growth rate below inflation may indicate stagnation or decline in real terms.
Using Trade Radar to monitor RPS metrics
Trade Radar provides tools to help investors track and analyse RPS and its growth over time. With Trade Radar, you can:
- Access RPS and RPS growth data: View RPS figures and five-year growth rates directly on the platform, making it easy to evaluate the revenue trends of individual companies.
- Set up alerts for RPS changes: Receive notifications when there are significant changes in RPS or RPS growth, keeping you updated on shifts in a company’s financial performance.
- Build a watchlist with RPS filters: Focus on companies with positive RPS growth or strong revenue metrics by adding them to your customised watchlist.
These tools enable investors to integrate RPS analysis into their decision-making process, helping them identify companies with strong revenue growth potential.
The role of RPS in fundamental analysis
Revenue Per Share (RPS) is an essential metric in fundamental analysis, offering insights into a company’s revenue on a per-share basis. When combined with RPS growth over time, it provides a clearer picture of a company’s sales trajectory and growth potential. Investors can use RPS to evaluate both individual stocks and sectors, while also factoring in the impact of corporate actions like share splits and buybacks.
However, like any financial metric, RPS should be used in conjunction with other indicators, such as EPS and industry comparisons. By understanding how RPS and RPS growth work together, investors can make more informed decisions and develop a robust strategy for identifying potential investment opportunities.
Track RPS metrics and growth with Trade Radar. Stay informed on revenue trends, set up custom alerts, and make data-driven investment decisions.
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