Earnings Per Share

Examples of Earnings Per Share in the following topics:

• Calculating Diluted Earnings per Share

  • Diluted earnings per share (EPS) takes the basic EPS formula and accounts for the effect of dilutive shares on earnings.
  • So, basic earnings per share tends to have a higher value than diluted earnings per share.
  • Diluted earnings per share is the most conservative per share earnings number because the equation takes into account the largest number of common shares that could be outstanding.
  • Earnings per share shows the amount of income applicable to each share of common stock.
  • Explain why a company would calculate diluted earning per share for its stock

• Earnings per Share

  • Earnings per share (EPS) is the amount of a company's earnings per each outstanding share of a company's stock.
  • Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.
  • Earnings per share for continuing operations and net income are more complicated; any preferred dividends are removed from net income before calculating EPS.
  • Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted outstanding shares (i.e. including the impact of stock option grants and convertible bonds).
  • Morningstar reports diluted EPS "Earnings/Share $" (net income minus preferred stock dividends divided by the weighted average of common stock shares outstanding over the past year).

• Special Reporting

  • Other special reporting issues include Earnings per Share, Retained Earnings and Intraperiod Tax Allocation.
  • Earnings per Share: If a company reports any irregular items on its income statement, then it must report earnings per share for those items.
  • Earnings per share measures the dollars earned by each share of common stock.
  • There are two forms of earnings per share that are reported: basic and diluted.
  • Diluted earnings per share are considered a more reliable way to measure earnings per share.

• Price/Earnings Ratio

  • Price to earnings ratio (market price per share / annual earnings per share) is used as a guide to the relative values of companies.
  • In stock trading, the price-to-earnings ratio of a share (also called its P/E, or simply "multiple") is the market price of that share divided by the annual earnings per share (EPS).
  • The price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings that would be required to pay back the purchase price, ignoring inflation, earnings growth, and the time value of money.
  • P/E ratio = Market price per share / Annual earnings per share
  • The earnings per share in the denominator may vary depending on the type of P/E.

• Performance per Share

  • Earnings Per Share (EPS) is the amount of earnings per each outstanding share of a company's stock.
  • Price to Earnings (P/E) ratio relates market price to earnings per share.
  • P/E Ratio = Market Price Per Share / Annual Earnings Per Share .
  • Dividend Yield ratio shows the earnings distributed to stockholders related to the value of the stock, as calculated on a per-share basis.
  • The second method, using per-share values, is to divide the company's current share price by the book value per share, which is its book value divided by the number of outstanding shares (Share Price / Book Value Per Share).

• Income Statement Analyses

  • Earnings per Share = (Net Income - Preferred Dividends) / Shares of Stock Outstanding
  • Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.
  • Price to Earnings Ratio = Market Value of Stock / Earnings per Share
  • In stock trading, the P/E ratio (price-to-earnings ratio) of a share (also called its "P/E," or simply "multiple") is the market price of that share divided by the annual Earnings per Share (EPS).
  • The price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings which would be required to pay back the purchase price, ignoring inflation, earnings growth and the time value of money.

• Benefits of Repurchasing Shares

  • The company may feel that the shares are undervalued, an executive's compensation may be tied to earnings per share targets, or it may need to prevent a hostile takeover.
  • For shareholders, the primary benefit is that those who do not sell their shares now have a higher percent ownership of the company's shares and a higher price per share.
  • In some instances, executive compensation may be tied to meeting certain earnings per share (EPS) metrics.
  • If management needs to boost the EPS of the company to meet the metric, s/he has two choices: raise earnings or reduce the number of shares.
  • If earnings cannot be increased, there are a number of ways to artificially boost earnings (called earnings management), but s/he can also reduce the number of shares by repurchasing shares .

• Relationship Between Dividend Payments and the Growth Rate

  • The portion of the earnings not paid to investors is, ideally, left for investment in order to provide for future earnings growth.
  • Capital that is kept from investors is known as retained earnings.
  • Firms that can do this tend to retain more of their earnings.
  • As they mature, they tend to return more of the earnings back to investors.
  • Note that dividend payout ratio is calculated as dividend per share divided by earnings per share.

• Dividends Payable

  • When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders as dividends.
  • Many corporations retain a portion of their earnings and pay out the remaining earnings as a dividend.
  • A dividend is allocated as a fixed amount per share.
  • Therefore, a shareholder receives a dividend in proportion to the shares he owns -- for example, if shareholder Y owns 100 shares when company Z declares a dividend of USD 1.00 per share. then shareholder Y will receive a dividend of USD 100 for his shares.
  • The per share dividend amount is multiplied by the number of shares outstanding and this result is debited to retained earnings and credited to dividends payable.

• Dividend Payments and Earnings Retention

  • Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
  • A dividend is allocated as a fixed amount per share.
  • Retained earnings are shown in the shareholder equity section in the company's balance sheet–the same as its issued share capital.
  • Thus, if a person owns 100 shares and the cash dividend is $0.50 per share, the holder of the stock will be paid $50.
  • The part of the earnings not paid to investors is left for investment to provide for future earnings growth.