What is Pro Forma Earnings per Share?
Jaap de Jonge, Editor, Netherlands
Disclosure of pro-forma earnings is a voluntary practice used by firms. Its popularity and
growing use along with official GAAP earnings causes concerns among investors and institutions. Some argue that
managers opportunistically exclude certain expenses in an attempt to influence investors’ decisions. However, it could also give managers the opportunity to better present the performance of their organization.
DEFINITION OF PRO FORMA EARNINGS PER SHARE
Pro Forma Earnings Per Share (EPS) is a special (non-GAAP) calculation of EPS, typically in case a merger or acquisition takes (has taken) place, and all financial metrics, as well as the number of shares outstanding, are updated to reflect the transaction.
While "regular EPS" is calculated by dividing a firm’s net income by its weighted shares outstanding, "Pro forma EPS" adds the target firm’s net income and any additional synergies or incremental adjustments to the numerator, while adding new shares issued due to the acquisition to the denominator.
PRO FORMA EPS FORMULA:
Pro Forma EPS = (Acquirer’s Net Income + Target’s Net Income +/- “Incremental Adjustments”) / (Acquirer’s shares outstanding + New Shares Issued).
For example, if a firm sells a business unit, it could, in reporting its historical results, exclude the past expenses and revenues associated with that unit. This allows for comparing "apples-to-apples".