Diluted EPS

Examples of Diluted EPS in the following topics:

• Earnings per Share

  • Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted outstanding shares (i.e. including the impact of stock option grants and convertible bonds).
  • To find diluted EPS, basic EPS is first calculated for each of the categories on the income statement.
  • Then each of the dilutive securities are ranked based on their effects, from most dilutive to least dilutive and antidilutive.
  • Then the basic EPS number is diluted one by one by applying each, skipping any instruments that have an antidilutive effect.
  • Calculations of diluted EPS vary.

• Calculating Diluted Earnings per Share

  • Diluted earnings per share (EPS) takes the basic EPS formula and accounts for the effect of dilutive shares on earnings.
  • Diluted EPS = USD 922,590,000 / 3,417,000,000 + 1,000,000,000 = USD .20 per share.
  • Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted common shares outstanding (i.e. which includes the impact of instruments such as stock option grants and convertible bonds).
  • Diluted EPS indicates a "worst case" scenario, one in which everyone who could have received stock did so without purchasing shares directly for the full market value.
  • Basic EPS, based on net income, is followed by diluted earnings per share and and both figures are reported on the income statement.

• Ratio Analysis and EPS

  • Ratio analysis and EPS are used to compare the strengths and weaknesses of various companies with industry or company benchmarks.
  • Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.
  • In the United States, the Financial Accounting Standards Board (FASB) requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.
  • The EPS formula does not include preferred dividends for categories outside of continued operations and net income.
  • Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.

• Understanding Future Stock Value

  • P/E Ratio: For example, if the stock is trading at 10 and the EPS is 0.50, the P/E is 20 times.
  • EPS is the total net income of the company divided by the number of shares outstanding.
  • Numbers are usually reported as a GAAP EPS number (which means it is computed using mutually agreed upon accounting rules) and a Pro Forma EPS figure (income is adjusted to exclude any one time items as well as some non-cash items like amortization of goodwill or stock option expenses).
  • To compute this figure, the stock price is divided by the annual EPS figure.
  • To measure it, multiply the current stock price by the fully diluted shares outstanding.

• Drawbacks of Repurchasing Shares

  • All financial ratios that include the number of shares outstanding (notably earnings per share, or EPS) will be affected by share repurchases.
  • Since compensation may be tied to reaching a high enough EPS number, there is an incentive for executives and management to try to boost EPS by repurchasing shares.
  • Inaccurate EPS numbers are not good for investors because they imply a degree of financial health that may not exist.

• Benefits of Repurchasing Shares

  • In some instances, executive compensation may be tied to meeting certain earnings per share (EPS) metrics.
  • If management needs to boost the EPS of the company to meet the metric, s/he has two choices: raise earnings or reduce the number of shares.
  • If one of these targets is EPS, they may have an incentive to try to increase EPS artificially.

• ROE and Potential Limitations

  • Stock prices are most strongly determined by earnings per share (EPS) as opposed to return on equity.
  • EPS is equal to profit divided by the weighted average of common shares.
  • EPS is equal to profit divided by the weighted average of common shares.

• Seasoned Equity Offering

  • The new shares dilute the value of the existing shares, and this is understandably, typically not looked upon kindly by those who own shares before the dilution.
  • In theory, this dilution should correspond directly to a drop in the share price such that the market capitalization of the company remains the same.
  • The sale of the shares does not benefit the company, and, more importantly, is not dilutive.
  • The dilution of the shares outstanding should theoretically be met with a corresponding drop in share price.

• Repurchasing Stock

  • Reasons can include: (1) to cancel and retire the stock; (2) to reissue the stock later at a higher price; (3) to reduce the number of shares outstanding and increase earnings per share (EPS); or (4) to issue the stock to employees.
  • For accounting purposes, treasury shares are included in calculations to determine legal capital, but are excluded from calculations for EPS amounts.
  • It can improve EPS due to the fewer number of shares outstanding as well as unchanged earnings.

• Combining Operating Leverage and Financial Leverage

  • Earnings can be measured in terms of EBIT, earnings before interest and taxes, or EPS, earnings per share.