Definition:
Earnings Per Share is the proportion of profits available to shareholders over the average number of shares outstanding. It is s calculated by dividing the net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding.
Earnings Per Share (EPS) is widely used as a measurement of the company’s performance and is of particular importance in comparing results over a period of several years. A company must be able to sustain its earnings to pay dividends and reinvest in the business to achieve future growth.
Investors also look for growth in the EPS from one year to the next.
Related: Fixed Charge Coverage Ratio
Formula:
Earning Per Share = Net Income – Prefer Dividend / Weight Average Common Share Outstanding
- Net Income is the net profit after deduction of interest and tax, and for the consistency period with weight average common share outstanding. For example, if the net income for 1 January 2016 to 31 December 2016, then the Weight Average Common Share Outstanding for the same period.
- Share outstanding normally change from time to time. Therefore, to make sure the Earning Per Share is fairly calculated, we should use the weighted average.
How to calculate earning per share?
For the period ended 31 December 2014, company A has made a profit before tax of $9,000,000. Income tax for the years amount $2,000,000.
The company share capital structure are as follow:
Ordinary share (1,000,000 @$1) = $ 1,000,000
8% preference share = $ 200,000
Total = $ 1,200,000
Earnings Per Share for December 2014
Solution:
Profit before tax for the years = $9,000,000
Less income tax = ($2,000,000)
Profit after tax = $7,000,000
Less preference share dividend
( 200,000 @ %8) = ($ 16,000)
Earnings attribute to ordinary shares = $6,984,000
Number of ordinary shares = 1,000,000
Earning per share = $6.984
Related: Profitability Ratios Analysis (Ultimate Guide)
Explanation:
In this example, Earning Per Share for the year 31 December 2014 for company A is $6.984.
To make this earnings per share make more sense for analysis, such information may require including last year’s earnings per share, industry average, and investor expectation.
Earnings per share are one of the indicators that investors always consider the most important one. Most of the company’s management always tries to ensure that their company’s earnings per share are healthy and growing. As Earnings Per Share uses accounting techniques to calculate, many questions are to be asked how transparency, consistency, accuracy, and fairness of earnings per share.
Manipulation of accounting information and using the incorrect accounting method to get healthy earning per share might be done by management.
Please note that Earnings Per Share is one of the targets for shareholders or investors. But it is the short-term view and involves with accounting technique that smart CFO could play around with the figure to make sure it looks healthy.
Written by Sinra
