Definition
Earnings Per Share (EPS) which is also called ‘Net Income Per Share is an accounting ratio computed usually at the end of the financial year on the basis of profit earned. This ratio is market prospect and computes profitability levels of an entity. Here the word earnings has the same meaning as profit.
If we want to elaborate the above definition of Earning Per share, we can further define this ratio as portion of company’s profit allocated to each ordinary share outstanding. This is very important to note that in calculation of this ratio, preferred shares are not taken into account and accordingly ignored. Similarly, while arriving at net income, dividends on preferred shares are subtracted or removed.
Formula
While calculating Earning per Share, we should keep in mind that dividends payable on preferred shares are subtracted from the net income of the period. The net income we have after subtracting preferred dividends is divided by number of weighted average outstanding shares. In more simple words, we can calculate it by removing preferred dividends from net income of the period and dividing by the weighted average common shares outstanding. The formula will look like this.
Example
On January 01, 2015 a total number of outstanding shares were 8,000. On September 30, 2015 further 4,000 right shares were issued at market price. The year end is December 31 and the profit for period/year was 30,000 $. Dividend on preferred share is to be paid $ 1,200.
Required
- Determine weighted average number of shares
- Calculate Earnings per Share
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Solution
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Weighted Average number of shares
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| Date |
Issued
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Cumulative
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W. Average
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1-Jan
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8000
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8000
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6000
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(8,000 x 9/12)
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30-Sep
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4000
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12000
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3000
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(12,000 x 3/12)
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12000
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9000
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EPS
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Total net income for the year
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$30000 | |||
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Less: Preferred dividends
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$1200 | |||
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Earning per Share
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$28800 | |||
Dilution & Anti-dilution
As per the language of International Accounting Standards
Dilution is a reduction in earnings per share or an increase in loss per share. Such reduction/increase may be the result of certain factors like assumption that convertible instruments are converted or that ordinary shares are issued upon the satisfaction of specified conditions. This is "diluted EPS".
Anti-dilution would mean an increase in earnings per share or a reduction in loss per shares resulting from certain causes/assumptions or factors. This is "Anti-diluted EPS".