.

Earnings Per Share Assignment Help

Earnings per share (abbreviated as EPS) can be defined as the portion of a company's profit allocated to each outstanding share of common stock. Companies are required to show EPS with their income statement. Earnings per share serve as an indicator of a company's profitability.

Calculation of EPS:-

EPS can be calculated by dividing net profit or loss for a period attributable to equity shareholders by the weighted average number of common shares outstanding during the period. Preferred stock rights have precedence over common stock. Therefore, dividends declared on preferred shares are subtracted from net profit before calculating the EPS. When preferred shares are cumulative, the annual dividends are deducted whether they have been declared or not. Dividends in arrears are not relevant when calculating EPS.

EPS = (Net profit – Preferred Dividends)/ Weighted average common shares outstanding

When calculating, it is more prudent to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. Moreover, the use of weighted average common shares outstanding delivers accurate result. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Example:

XYZ Inc. had net profit of $500,000 during the year ended December 31, 2013 and its weighted average common shares outstanding were 200,000 during the year. There were no preferred stock outstanding and preferred stock dividend. Calculate the EPS of XYZ Inc.

Given,

Net profit = $500,000


Earnings Per Share Assignment Help Through Online Tutoring and Guided Sessions at MyAssignmentHelp


Weighted average of common shares outstanding = 200,000

EPS = (Net profit – Preferred Dividends)/ Weighted average common shares outstanding

= 500,000/200,000 = $2.5 per share

Types of EPS:-

i) Basic earnings per share: It should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

ii) Diluted earnings per share: For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares*.

An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal would be a {"better"} company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

*A potential equity share is a financial instrument or other contract that entitles, or may entitle, its holder to equity shares.

.