Earnings Per Share is the proportion of profits available to shareholders over the average number of shares outstanding.
Earnings per share are 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 in order to pay dividends and reinvest in the business so as to achieve future growth.
Investors also look for growth in the EPS from one year to the next.
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 a period of 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 $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
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
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, there is much information which may require including last year earning per share, industry average, and investor expectation.
Earnings per share are one of the indicators that investor always consider as the most important one, and most of the company’s management always try to make sure that their company’s earning per share is healthy and growing.
As Earnings Per Share use accounting technique to calculate, there are a lot of questions to be asked how transparent, 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 the figure to make sure it looks healthy.
Written by Sinra