earnings per share

Basic EPS

Aim to provide basis for comparison of performance of different entities in same period and same entity in different periods

Basic EPS

Both basic and diluted shown on face of SPLOCI

Calculation

EPS = earnings (profit after tax - pref divs - NCI if group/ WA no of equity shares outstanding during period

WA Changes in no of equity shares outstanding during the period

Share issues:

• issued at full market price, assume increase in earnings so use WA no of shares (no retrospective)

• Bonus issue no money so no affect on earnings so apply retrospective incl restatement of comparatives

• Rights issue some affect on earnings so treat as both full market price and bonus

Bonus issue

Bonus fraction to adj number of ordinary shares outstanding before issue

High no / low no

After / before = BF

(BF x prev year no of shares to give new number of shares

Then earnings / new number of shares = restated eps

Rights issue

BF = FV per share immediately before exercise rights / theoretical ex- rights price Terp

$ before H / $ after L

Terp = FV of os shares + total recd from exercise rights / no of shares outstanding prior to the exercise + no of shares issued in exercise

Diluted EPS

If a commitment to issue shares in future (no new cash) eg exercise of options or loan stock. Diluted EPS shows how basic EPS would change if potential (future) ordinary shares become ordinary shares. Warning measure for current ord shareholders

Diluted EPS calc

• assume all potential ord shares converted at beginning of period (or actual date of issue if later) and at most advantageous rate for the potential holder

• Earnings adj for interest of preference dividends saved on conversion

• Net increase in earnings net of tax relief on interest (you won’t get that tax relief)

• Basic earnings + saving on interest debt, net of income tax saved = earnings

• No of shares = basic wa + additional shares on conversion

Share options or warrants

• potential ord shares as holder may convert in future if exercise price is less than market value

• Calculate diluted eps - split into 2 parts ; shares that would be exercised if cash recd on exercise had been used to buy shares at av market price (ignore as don’t dilute) + shares treated as issued for no consideration

• Calculation: no of shares under option less no would have been issued at av market price (no of options x exercise price / amp) = no of shares treated for nil consideration

EPS as performance indicator

• maybe better indication than profit of financial performance as considers changes in capital during period

• Key stock market indicator

• It’s role in P/E ratio and ability to compare diff companies and value for money measure

• But it’s based on historical info

• But diluted eps is only theoretical - markets don’t always react in same way

• EPS incl one off income/ exp which can distort