Earnings per Share (EPS)
What is Earnings Per Share?
Earnings per share are the net result of the company earned on one share. It is an important and widely used measure that audited the financial reports of the companies and also mentions in particular in most countries. In other words, it expresses the earning power of the company, if divided by the value of one share. We usually call it return on equity. The higher the EPS, the better the company’s performance and outlook. EPS ‘multi-year track record reflects the company’s growth rate and potential investors look forward to investing in the company if they see an upward trend.
Formula For Calculating Earnings Per Share
The Formula used for earnings per share ration is as follows
Earnings per Share = Profits/Earnings after taxes (EAT) – Preference Shares Dividend/Number of Equity shares Outstanding
The steps for calculating post-tax earnings / gains less deduction of preferred stock dividend (also known as earnings available to shareholders whether or not distributed as dividends) are as follows:
Net Profit: Take the net profit / loss for the year from the company’s income statement. Audited financial data is preferred because it ensures proper compliance with all accounting standards and generally accepted accounting principles. Net profit here means that the profit has arrived after deduction of taxes. The tax rate would differ for different countries according to the respective laws.
Deduct Preference Shares Dividend: Regarding preference shares, the dividend for cumulative preference shares is deducted even if not distributed, but for non-cumulative preference shares, the dividend is deducted only when distributed.
A number of outstanding shares
The number from existing shareholders. If the number of shares changes in the financial period, a weighted average of shares is calculated. Weights are given according to the number of days or months outstanding during the year.
DILUTED PROFIT PER SHARE
The diluted EPS is the EPS, assuming that all convertible securities have already been converted into shares. Convertible securities such as employee stock option, convertible preferred share, convertible bonds, etc. It is the EPS after giving the effect of such securities on both the numerator and the denominator of the EPS. The numerator is increased by the amount of dividend or interest that is not paid in the event of conversion of such securities. The denominator increases with the no. of shares issued as a result of such conversion.
So the formula becomes
Diluted Earnings Per Share = (EAT- Preference Dividend+ Expenses because of conversion of Equity Shares) / (Weighted Avg. No. of Equity Shares+ Weighted Avg. Converted Equity Shares)
ADJUSTED EARNINGS PER SHARE
Adjusted earnings per share are the ratio of net income from regular activities available to shareholders of shares. It does not affect the following:
Extra ordinary items: items that appear suddenly without prior notice, such as windmill profit or loss from natural disasters, etc.
Irregular Activities: Activities that are not part of the day-to-day business of the company, such as asset sales, loss through fire, etc.
Adjusted EPS mainly serves for comparisons between Intra Company and Intercompany.
NEGATIVE EARNINGS PER SHARE
Sometimes companies incur losses, i.e. negative profits, which make the EPS negative. Negative EPS shows how much money the company has lost per share. Shareholders do not have to pay the loss share directly to the company, but suffer indirectly. The net loss decreases the value of the company, which in turn decreases the value of the shares. Negative EPS is not always a reason to panic. Sometimes it is also a good sign. For example, when a company develops new products, or when it incurs large one-off costs, the negative EPS for a certain period is a temporary phenomenon.
INTERPRETATION / ANALYSIS OF EARNINGS PER SHARE
Earnings per share are most frequently present in financial statements and are a very reliable figure for investors. It is useful for existing and new equity shareholders for forecasting the value of the shares in the future. A high EPS is a sign of better earnings, strong financial position and therefore a reliable company to invest in. The EPS for several years indicates the growth pattern of the company. It also helps in comparison to figures of different companies in the same industry.