Earnings per share (EPS) is the monetary value of
earnings per
outstanding share of
common stock for a company. It is a key measure of corporate profitability and is commonly used to price stocks.
In the United States, the
Financial Accounting Standards Board (FASB) requires EPS information for the four major categories of the
income statement
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
: continuing operations, discontinued operations, extraordinary items, and
net income.
Calculating
Preferred stock rights have precedence over common stock. Therefore, dividends on preferred shares are subtracted before calculating the EPS. When preferred shares are cumulative, annual dividends are deducted whether or not they have been declared. Dividends in
arrears are not relevant when calculating EPS.
;Basic formula
:Earnings per share =
;Net income formula
:Earnings per share =
;Continuing operations formula
:Earnings per share =
Diluted earnings per share
''Diluted earnings per share'' (diluted EPS) is a company's earnings per share calculated using fully diluted
shares outstanding (i.e. including the impact of
stock option grants and
convertible bond
In finance, a convertible bond or convertible note or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock ...
s). Diluted EPS indicates a "worst case" scenario, one that reflects the issuance of stock for all outstanding options, warrants and convertible securities that would reduce earnings per share.
Calculations
Calculations of diluted EPS vary.
Morningstar reports diluted EPS "Earnings/Share $", which is net income minus preferred stock dividends divided by the
weighted average of common stock shares outstanding over the past year; this is adjusted for dilutive shares. Some data sources may simplify this calculation by using the number of shares outstanding at the end of a reporting period. The methods of simplifying EPS calculations and eliminating inappropriate assumptions include replacing primary EPS with basic EPS, eliminating the treasury stock method of accounting from fully diluted EPS, eliminating the three-percent test for dual presentation, and providing information on individual dilative securities.
U.S. GAAP
Calculations of diluted EPS under
U.S. GAAP are described under Statement No. 128 of the Financial Accounting Standards Board (FAS No. 128). The objective of diluted EPS is to measure the performance of a company over the reporting period taking into account the dilutive effect of potential common stock that could be issued by the company. To compute diluted EPS, both the denominator (outstanding shares) and the numerator (earnings) may need to be adjusted.
''Diluted shares: ''
To calculate the total number of shares used in the calculation, FASB prescribes using the treasury method to calculate the dilutive effect of any instruments that could result in the issuance of shares, including:
* Stock options
* Warrants
* Convertible preferred stock
* Convertible bonds
* Share-based payment arrangements
* Written put options
* Contingently issuable shares
''Earnings: ''
The numerator used in calculating diluted EPS is adjusted to take into account the impact that the conversion of any securities would have on earnings. For example, interest would be added back
to earnings to reflect the conversion of any outstanding convertible bonds, preferred dividends would be added back to reflect the conversion of convertible preferred stock, and any impact of these changes on other financial items, such as royalties and taxes, would also be adjusted.
International financial reporting standards
Under
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
, diluted earnings per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential
common stock.
Dilutive potential common stock includes:
*
convertible debt
* convertible
preferred stock
* share warrants
*
share options
In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified da ...
* share rights
*
Employee stock purchase plan
In the United States, an employee stock purchase plan (ESPP) is a means by which employees of a corporation can purchase the corporation's capital stock, often at a discount. Employees contribute to the plan through payroll deductions, which b ...
s
* contractual rights to purchase shares
* contingent issuance contracts or agreement
See also
*
Accretion/dilution analysis
Accretion/dilution analysis is a type of M&A financial modelling performed in the pre-deal phase to evaluate the effect of the transaction on shareholder value and to check whether EPS for buying shareholders will increase or decrease post-deal ...
*
Dilutive security
*
P/E ratio
*
Whisper number
Whisper numbers are the "unofficial and unpublished earnings per share (EPS) forecasts that circulate among professionals on Wall Street... generally reserved for the favored (wealthy) clients of a brokerage." According to Per Afrell, a former an ...
References
External links
European banks’ earnings announcements video
Earnings Per Share Screener figures from official financial statements
{{Authority control
Corporate finance
Fundamental analysis
Financial ratios