The “earnings per share” refers to the net earnings of a company that are gained from one share. It is a significant and well used measurement. The idea of the EPS is that it gives the onlooker/investors an idea of the potential earnings/how much the company is question is able to achieve. It is known that if a company has a high EPS, its performance and forecast are good.
The formula used for the EPS calculation = Profits/Net Profits – Preference Share Dividend/ No. of Outstanding Equity Shares
In order to establish the net profits after taxes minus the preference share dividend takes the following steps:
– Establish the net profit – the net profit or loss for the financial year is taken from the account of the company (net profit refers to the profit obtained after the deduction of taxes)
– Take off preference share dividend: the dividend for growing preference shares will be taken off whether provided or not
Second, the number of Equity Shares Outstanding must be obtained.
These figures and then substituted into the equation shown above, and the EPS will be achieved.
Timothy Sykes says “Diluted EPS refers to the EPS after all convertible securities have been changed into equity. These could include convertible preference shares and debentures, for example.”
Adjusted Earnings Per Share
Adjust earnings per share refers to the amount of net profit taken from normal activities to shareholders. Adjusted EPS does not have any influence on:
– Extraordinary Items – those items/events which unexpectedly take place and that would be difficult for the company to replicate
– Non-regular activities – these refer to happenings that are not part of the normal daily operations of the company, for example, the loss of assets because of a natural disaster.
Negative Earnings Per Share
Whenever companies suffer from a negative earning, the EPS is made resultantly negative. This can still be helpful, since the negative EOS show the amount of money that the company lost per share. Whilst any present shareholders would not be expected to make up for the loss, they are still affected. Negative EPS can be a good thing as well as bad however, for example, if a company develops new products and has a resultant expense, a negative EPS is quite acceptable.
Interpreting/Analysing the Earnings Per Share (EPS) Calculation
Earnings per share results are often existent in a company’s financial statement at the end of the year. It is a well respected figure and is considered a trustworthy one for investors to consider before making a purchase, Not only for new, it is useful for existing shareholders to help in their predictions of what is going to happen with the value of the stock in future. Whilst a high EPS signifies good earnings and a sound financial state, a lower EPS is not necessarily a bad thing if it has a supporting explanation. If one would like to gain an idea of the company’s average growth from year to year, they can look at and compare against each other the EPS results from a number of years.