Earnings per Share
(EPS)

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Earnings per Share (EPS) is a traditional method used for determining corporate value. Similar words like EPS are: Accounting Earnings and Reported Earnings, except that EPS is divided by the average number of outstanding shares.

EPS calculation

Earnings per Share can be calculated by subtracting the dividends on preferred stock from net income, and dividing the result by the (weighted average of the) combination of all outstanding common shares and all common stock equivalents (see figure on the right).

Fully Diluted EPS

Fully Diluted EPS means that all common stock equivalents (convertible bonds, preferred stock, warrants, and rights) have been included along with the common stock.

A poor indicator of actual corporate value

Reported Earnings are a very poor indicator of corporate value.

Six major reasons why EPS fails to reliably measure the economic value of firms are:

1. Alternative accounting methods may be employed. Both required changes by FASB or IAS and voluntary changes can change EPS, but do not affect economic value.
2. Risk is excluded. Both business risk and financial risk are not accounted for in annual reports.
3. Investment requirements are excluded. Changes in for example the working capital are not considered in Reported Earnings.
4. Dividend policy is not considered. For example dividend decreases will show increased EPS but are in fact value neutral.
5. The time value of money is ignored. No present value calculation in Reported Earnings.
6. The increased role which intangible assets play in our economic system, that has moved from an industrial economy towards a services and knowledge oriented economy.

Despite Enronitis, Earnings per Share is still being widely used in many annual reports.

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide

Book: Ciaran Walsh - Key Management Ratios

Forum Forum discussions about Earnings per Share. Below you can ask a question about this topic, share your experiences, report a new development, or explain something. Start a new topic about Earnings per Share Share your knowledge here (or ask a question)   Restricted Stock Award in EPS Calculation When calculating my EPS should I include the Restricted Stock Awards (RSA)? The RSA were given out in Feb/09 and have a vesting period of 5 years. I am preparing my 10-Q for the first quarter of 2009.... 14   What is Ongoing EPS? In need to find a good definition of Ongoing Earnings per Share. Who can help?... 14   1 comments 🔥 NEW Consequences of Stock Price Decrease Hi, I would like to know if a company stock price decreases, why is this an issue and what are the consequences?... 13   10 comments What is Pro Forma EPS? What is Pro Forma Earnings per Share exactly?... 5   1 comments

Expert Tips Advanced insights about Earnings per Share. Here you will find professional advices by experts. What are the Indicators of High Quality of Earnings? Analyzing Reported Earnings The term quality of earnings usually refers to the degree of conservatism in a firm’s reported earnings. Indicators of h... What is the Degree of Management Discretion or Manipulation? Analyzing Reported Earnings The discretionary nature of income recognition permits an examination of the degree of management manipulation of earnin... Stock Buybacks as a Means of Value Extraction Stock Buybacks, Stock Repurchases, Corporate Profitability, Economic Prosperity, Executive Compensation, EPS According to Prof. Lazonick, in the USA the increased corporate profitability over the last couple of years did not lead... Computation of DILUTED EPS Financial Reporting Diluted EPS is a conservative measure of the earnings flow to each share, as this measure presumes the maximum possible ...

Information Sources Various sources of information regarding Earnings per Share. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. Financial Statement Analysis | Ratio Analysis Ratio Analysis, Finanical Statement Analysis This presentation provides insights in Financial statement and ratio analysis, and includes the following sectios: 1. F... Diluted EPS Financial Reporting This paper by Carol Marquardt and Christine I. Wiedman examines the economic consequences of changes in the financial re... 3 Minute Introduction to Financial Ratio Analysis: Why do it and What are the Main Types? Types of Financial Ratios, Financial Ratio Analysis, Financial Ratio Types Why financial ratio analysis? 1. To compare the financial health of (similar) companies (which one is doin... Prospective EPS Financial Engineering This report by Hraham Bates a.o. considers the relation between pro-forma and forecast consensus earnings per share (EPS... Earnings per Share Diagram Financial Reporting Download and edit this 12manage PowerPoint graphic for limited personal, educational and business use. Republishing in ...

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Compare with EPS:  EBIT  |  EBITDA  |  P/E Ratio  |  Economic Value Added  |  Cash Ratio  |  Current Ratio  |  Return on Equity  |  Fair Value  |  ROIC

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