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).

• 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.

• Ratio Analysis and EPS

  • If preferred dividends total $100,000, then that is money not available to distribute to each share of common stock.
  • If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
  • Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
  • 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 in that any preferred dividends are removed from net income before calculating EPS.

• ROE and Potential Limitations

  • Stock prices are most strongly determined by earnings per share (EPS) as opposed to return on equity.
  • Earnings per share is the amount of earnings per each outstanding share of a company's stock.
  • EPS is equal to profit divided by the weighted average of common shares.
  • In fact, return on equity is presumably irrelevant if earnings are not reinvested or distributed.
  • EPS is equal to profit divided by the weighted average of common shares.

• Combining Operating Leverage and Financial Leverage

  • Operating and financial leverage can be combined into an overall measure called "total leverage. " Total leverage can be used to measure the total risk of a company and can be defined as the percentage change in stockholder earnings for a given change in sales.
  • In other words, total leverage measures the sensitivity of earnings to changes in the level of a company's sales.
  • If the percentage change in earnings and the percentage change in sales are both known, a company can simply divide the percentage change in earnings by the percentage change in sales.
  • Earnings can be measured in terms of EBIT, earnings before interest and taxes, or EPS, earnings per share.
  • While EBIT can be determined by referencing a company's income statement, we can determine earnings per share by dividing the company's net income by it's average price of common shares.

• 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.

• Repurchasing Shares

  • In a share repurchase, the issuing company purchases its own publicly traded shares, thus reducing the number of shares outstanding.
  • When a company repurchases its own shares, it reduces the number of shares held by the public.
  • The reduction of the shares outstanding means that even if profits remain the same, the earnings per share increase.
  • Repurchasing shares will lead to a corresponding increase in price of the shares still outstanding.
  • If the company has put rights on its shares, it may use them to repurchase shares at that price.

• 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.