Earnings per share Flashcards
What are the earnings per a share?
- is widely regarded as the most important indicator of a company’s performance
How IAS 33Earnings per Share can achieve comparability by?
-defining earnings
- prescribing methods for determining the number of shares to be included in the calculation of EPS
- requiring standard presentation and disclosures
Basic calculation of Earnings per Share
Earnings / Shares
What are the earnings?
- group profit after tax, less non-controlling interests and irredeemable preference share dividends
What are the shares?
- weighted average number of ordinary shares in issue during the period
4 steps with rights issue to calculating EPS
- Calculate theoretical ex-rights price (TERP)
- Bonus fraction
- Weighted average number of shares
- Earnings per share (EPS)
Calculation theoretical ex-rights price (TERP)
Start with the number of shares previously held by an individual at their market price. Then add in the number of new shares purchased at the rights price. You can then find the TERP by dividing the total value of these shares by the number held
Bonus fraction
Market price before issue divided Theoretical ex rights price
Weighted average number of shares
Draw up the usual table to calculate the weighted average number of shares. When doing this, the bonus fraction would be applied from the start of the year up to the date of the rights issue, but not afterwards
Earnings per share (EPS)
Profit after tax divided by Weighted average number of shares
Diluted earnings per share (DEPS) when it occurs
- this increase in shares will reduce, or dilute, the earnings per share. The provision of a diluted EPS figure attempts to alert shareholders to the potential impact on EPS of these additional shares.
Examples of dilutive factors are:
- the conversion terms for convertible bonds/convertible loans
- the exercise price for options and the subscription price for warrants
Calculation of DEPS (Diluted earnings per share
Earnings + notional extra earnings divided by
Number of shares + notional extra shares
What if the convertible bonds/preference shares had been converted:
- the interest/dividend would be saved therefore earnings would be higher
- the additional earnings would be subject to tax
- the number of shares would increase
What gives an option or warrant?
- gives the holder the right to buy shares at some time in the future at a predetermined price
- cash is received by the entity at the time the option is exercised, and the DEPS calculation must allow for this.
What is the split into two when the total number of shares issued on the exercise of the option or warrant?
- the number or shares that would have been issued if the cash received had been used to buy shares at fair value
- the remainder, which are treated like a bonus issue
Calculation of the DEPS with an option
Number of options multiply by
Fair value minus exercise price
divided by fair value
What is the EPS figure to used to?
- used to compute the major stock market indicator of performance, the price earnings ratio (P/E ratio)
P/E ratio calculation
Market value of shares divided by EPS
Reasons of importance of DEPS
- it shows what the current year’s EPS would be if all the dilutive potential ordinary shares in issue had been converted
- it can be used to assess trends in past performance
- in theory, it serves as a warning to equity shareholders that the return on their investment may fall in future periods.