Earnings per share (EPS) is the monetary value of

earnings {{Short description, Financial term Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are u ...

per outstanding share of

common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other C ...

for a company during a defined period of time, often a year. It is a key measure of corporate profitability, focusing on the interests of the company's owners (

shareholder A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

s),Drake, P. P., Financial ratio analysis, p. 11, published on 15 December 2012 and is commonly used to price stocks. In the United States, the

Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Secur ...

(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'', ''statement o ...

: continuing operations, discontinued operations, extraordinary items, and

net income In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...

Calculation

Preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...

rights have precedence over common stock. Therefore, dividends on preferred shares are subtracted before calculating the EPS. When preferred shares are cumulative (i.e. dividends accumulate as payable if unpaid in the given accounting year), annual dividends are deducted whether or not they have been declared. Dividends in arrears are not relevant when calculating EPS. "Average common shares" in the formulae below refers to the average number of common shares outstanding during the time period. ;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 Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus representi ...

(i.e. including the impact of

stock option 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 ...

grants and

convertible bond In finance, a convertible bond, 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 in ...

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 * Stock 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 A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or ...

and

taxes A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

, would also be adjusted. One way to consider the effect of dilutive instruments on EPS is to think about the "as if" method, in the sense that "if the instrument is converted, how does it affect EPS?" For example, let Company XYZ have net income = $2,000,000, there are 50,000 shares of common stock outstanding, and $1,000,000 of 10% bonds, convertible into 50,000 shares of common stock. Company A's tax rate is 25%. Basic EPS = ($2,000,000 - ($1,000,000*10%))/50,000 = $38 Diluted EPS = ($2,000,000 + (25%*($1,000,000*10%))) / 50,000 + 50,000 = $20.25 Note that other than accounting for the shares of common stock added in the denominator of the EPS equation, we also add back the taxes that would have been taken out from net income if the bonds were not converted. In conclusion, the "as if" method is helpful in considering the effect on dilutive instruments on EPS because it helps us think about the overall effect rather than just thinking about the numerator and denominator of the equation separately.

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 fi ...

, diluted earnings per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential

. Dilutive potential common stock includes: * convertible debt * convertible

preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...

* share warrants * share options * share rights * Employee stock purchase plans * contractual rights to purchase shares * contingent issuance contracts or agreements. The earnings per share requirements of U.S. GAAP, FASB ASC 260: EPS, are a result of the FASB's cooperation with the IASB to narrow the difference between IFRS and US GAAP. A few differences remain. The differences that remain are the result of differences in the application of the treasury stock method, the treatment of contracts that may be settled in shares or cash, and contingently issuable shares.

References

External links

European banks’ earnings announcements
video
Earnings Per Share Screener
figures from official financial statements

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