Earnings Per Share Summary Lecture Notes

FINANCIAL STATEMENT ANALYSIS



TOPIC 6
EARNINGS PER SHARE (EPS)

Learning objectives

At the end of the lesson participants should be able to;

 Explain the use of earning per share
 Compute basic and diluted earnings per share
 Interpret and compare the earnings per share

Lecture outline

14. Introduction to earnings per share
15. Basic earnings per shares
16. Diluted earnings per share

6.1 Introduction

Finance is a highly competitive market and people are always finding new ways to earn
dividends and make money from the market. Calculating your Earnings per Share provides a lot
of information. Earnings per share are often based upon the amount of profit that any given
company is making, which is then divided between any shares that are outstanding from stock
that is available to be purchased on the market. An Earnings per Share is a great metric to value
any given company’s overall profitability and can be used to improve your predictions in the
future.

Earnings per Share introduce how to stock market works and when you begin to learn how to
use the stock market to make money, things can be quite confusing. Earnings per share (EPS)
refer to the amount attributable to each unit of outstanding equity share. The first EPS statistic is
basic earnings per share, calculated on (1) earnings before discontinued operations and
extraordinary items, and (2) net income. The EPS effect of discontinued operations and/or
extraordinary items must also be shown separately.

Basic EPS is useful for comparing a company’s current performance with its past record.

However, many companies have significant amounts of convertible securities and/or stock
options outstanding which pose the possibility of potential substantial change in the
corporation’s capital structure. Therefore, in order to provide the basis for useful forward
comparisons, diluted EPS must also be disclosed.




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, FINANCIAL STATEMENT ANALYSIS



Diluted earnings per share shows the maximum dilution to EPS that could occur of all potentially
available common shares were issued that is, if all stock options were exercised, and all
convertible debt and convertible preferred shares were converted to common shares.

Diluted EPS must be calculated both on (1) earnings before discontinued operations and
extraordinary items, and (2) net income. The diluted EPS effect of discontinued operations and/or
extraordinary items must be disclosed as well.

Basic and diluted EPS must be shown on the face of the income statement

The per-share amounts for discontinued operations and extraordinary items may be shown either
on the face of the income statement or in the disclosure notes

Significance of EPS

 Investors use EPS as an indicator of performance besides the net profit or loss reported
MPS
 EPS is used in the popular P/E ratio i.e. P/E ratio=
EPS
 In some entities executive remuneration is pegged on the size and growth in EPS

6.2 Basic Earnings per Share

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the
entity (the numerator) by the weighted average number of ordinary shares outstanding (the
denominator) during the period.

The denominator (number of shares) is calculated by adjusting the shares in issue at the beginning
of the period by the number of shares bought back or issued during the period, multiplied by a
time-weighting factor.




Illustration 1;
For example, assume that a company has a net income of Ksh.25 million. If the company pays out
Ksh.1 million in preferred dividends and has 10 million shares for half of the year and 15 million
shares for the other half

Required:
Calculate the EPS


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