Earnings Per Share Flashcards
What accounting standard deals with earnings per share
IAS 33 Earnings per share
do any of the other ratios have their own financial standards
no
what is the scope of IAS 33 Earnings per share
listed companies (Plcs)
Private companies can if they want
why is the EPS an important ratio
feeds into Price Earnings ratio, indicator of market sentiment
when a group must disclose their EPS, do they disclose for just the parent or the group as a whole
group as a whole
where is the earnings per share disclosed
on the income statement
up front and on the face of the financial statements
how to calculate basic EPS
net profit or loss for the period attributable to ordinary shareholders / weighted average no. of ordinary shares outstanding in the period
what does net profit/loss attributable to ordinary shareholders mean
profit or loss after tax and after preference dividends
why are the number of shares for calculating basic EPS time weighted
so shares issued at beginning, middle and end of the year are treated different
how to calculate the weighted average number of shares outstanding in the period for basic EPS calculation
shares at beginning of year
+
(shares issued during the year * time weighting factor)
-
(shares bought back during the year * time weighting factor)
how will bonus issues effect EPS
will increase the number of shares, but not the profit
what are bonus issues
free extra shares to existing shareholders, depending on how many they own, in proportion to existing shareholding
does the shareholders proportion of shares held change after the bonus issue
no
are bonus shares time weighted
no
always deemed to have occurred at the start of the year
must back date to the earliest period presented in the financial statements
why for bonus issues do you back date until the earliest date in the financial statements?
for comparability
what is the previous years EPS adjusted for comparability purposed called
restated eps
what is a rights issue
offer to existing shareholders to buy more shares at a price less than market value in proportion to existing shareholding
is market value of shares expected to rise or fall after rights issue
fall, as you are giving away something for less than its value
what are the three steps for calculating EPS with a rights issue
- calculate the theoretical fall in the market value of shares in the short term caused by the rights issue
- compute the bonus size that would have caused the same market price fall
- treat the remainder of the rights issues as an issue at full market price
how do you calculate the size of the bonus issue that would have caused the same market price fall
no of shares before rights issue
*
(market value before rights issue/theoretical market value after rights issue) -1
what is diluted EPS
EPS that includes all potential future shares, out of prudency
examples of cases where shares might be issued in the future
convertible bonds and options
what is the negative affect of all of the potential shares being converted
dilutive effect on EPS
what is the positive affect of all of the potential shares being converted
no interest needs to be paid on convertible bonds and options anymore
what does it mean if potential ordinary shares are dilutive
they decrease EPS
what does it mean if potential ordinary shares are antidilutive
they increase EPS
what are some problems with placing too much emphasis on EPS
- just tells us about earnings and equity, tells us nothing about debt, too much debt is risky
- EPS can be manipulated in the short term e.g. staff cuts, cutting expenses, selling more on credit
- Can change EPS with share buybacks.
Would prefer for the company to make longterm investments to improve EPS
if there are multiple conversion dates and scenarios in a question, which should be selected
the one that results in the most new equity being issued and will hurt equity the most
