EARNINGS PER SHARE

Meaning

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding
shares of its common stock. The resulting number serves as an indicator of a company's
profitability. It is common for a company to report EPS that is adjusted for extraordinary
items and potential share dilution.

In the United states, the Financial Accounting Standards Boards (FASB) requires for EPS
information for the four major categories of

 The income statement

 Continuing operations
 Discontinued operations
 Extraordinary items
 And net income

Calculation of EPS

Preferred stock rights have precedence over common stock. Therefore, dividends on
preferred shares are subtracted before calculating the EPS. When preferred shares are
cumulative, annual dividends are deducted whether or not they have been declared.
Dividends in arrears are not relevant when calculating EPS.

Basic formula
Earnings per share = profit − preferred dividends/ weighted average common shares
Net income formula
Earnings per share = net income − preferred dividends/average common shares
Continuing operations formula
Earnings per share = income from continuing operations –preferred
dividends/weighted average common shares

Usage of EPS
Earnings per share is one of the most important metrics employed when determining a firm's
profitability on an absolute basis. It is also a major component of calculating the price-to-
earnings (P/E) valuation ratio, where the E in P/E refers to EPS. By dividing a company's
share price by its earnings per share, an investor can see the value of a stock in terms of how
much the market is willing to pay for each dollar of earnings.

EPS is one of the many indicators you could use to pick stocks. If you have an interest in
stock trading or investing. Comparing EPS in absolute terms may not have much meaning to
investors because ordinary shareholders do not have direct access to the earnings. Instead,
investors will compare EPS with the share price of the stock to determine the value of
earnings and how investors feel about future growth.

What counts as a “GOOD” EPS will depend on factors such as the recent performance of
the company, the performance of its competitors, and the expectations of the analysts who
follow the stock. Sometimes, a company might report growing EPS, but the stock might
decline in price if analysts were expecting an even higher number.

Likewise, a shrinking EPS figure might nonetheless lead to a price increase if analysts were
expecting an even worse result. It is important to always judge EPS in relation to the
company’s share price, such as by looking at the company’s P/E or earnings yield.

Types of EPS – Basic EPS and Diluted EPS

Basic EPS measures how much a business earns per share without going much into any other
detail. Simply by dividing the (net income – preferred dividend) with the number of
outstanding equity shares, we would be able to calculate basic EPS.

Diluted EPS, on the other hand, takes convertible securities into account to calculate
earnings per share Convertible securities include convertible preferred shares, employee
stock options, debt, equity, etc.
 Basic EPS is a simple measure of profitability. Diluted EPS, on the other hand, is a
complex measure.
 Basic EPS is the most suitable, but not very sound approach to finding out how a
company is doing financially. Diluted EPS is a much better and strictest approach to find out
how a company is doing financially.
 Basic EPS is used for companies that have a simple capital structure. Diluted EPS is
used for companies that have complex capital structures.
 Basic EPS is always higher than diluted EPS since, in diluted EPS, all convertible
securities are added to the common shares in the denominator.

A few more examples for EPS

󰡃Reported EPS or GAAP EPS.

󰡃Ongoing/Pro Forma EPS.

󰡃Carrying Value/Book Value EPS.

󰡃Retained EPS.

󰡃Cash EPS.

󰗐Reported EPS or GAAP EPS

Reported EPS or GAAP EPS is the number derived from generally accepted accounting

principles (GAAP). This is the number that is reported in SEC filings.

A company's reported earnings can even be distorted by GAAP. For example, a one-time

gain from the sale of machinery or a subsidiary could be considered as operating income

under GAAP, causing EPS for the quarter to spike. Similarly, a company could classify a big

lump of normal operating expenses as an "unusual charge," which excludes it from the

calculation and artificially boosts EPS.

󰗐Ongoing/Pro Forma EPS

Ongoing EPS is based on ordinary net income and therefore excludes anything that could be

termed an unusual one-time event. The goal here is to discover the stream of earnings from

core operations, meaning ongoing EPS is a reasonably reliable indicator of future EPS.

This variation is also called pro forma EPS. The words "pro forma" indicate that some

assumptions had to be used in the formula. Pro forma EPS generally excludes some

expenses or income that were used in calculating reported earnings. For example, if a

company sells a large division, it could, in reporting its historical results, exclude the past

expenses and revenues associated with that unit. This allows for an "apples-to-apples"
comparison.

In reporting pro forma EPS, a company's management may choose to subtract some

expenses because they are one-time costs. That distorts the company's true earnings.

Non-recurring expenses, however, are appearing with increasing regularity these days. This

raises questions as to whether some companies are just fiddling with numbers to enhance

their EPS.

󰗐Carrying Value/Book Value EPS

Carrying value per share, more commonly referred to as the book value of equity per share

(BVPS), measures the amount of company equity in each share. This measure focuses on

the balance sheet and not much else, so it is a static representation of company

performance.

Nevertheless, the general trend of this number suggests how effective management is at

increasing shareholder equity. The current BVPS should tell the investor how much a share

would be worth if the company had to be liquidated and all of its assets sold.

󰗐Retained EPS

Calculating retained earnings per share requires taking the net earnings number, adding any

currently held retained earnings, subtracting the total amount of dividends paid out, and

finally dividing the remaining amount by the number of outstanding shares. That figure is the

amount of profit that is kept by the company rather than being shared with stockholders in

the form of dividends.

The amount of any retained earnings not spent in a given period is added to the net earnings

of the following period to arrive at the retained earnings calculation for that period. In short,
retained earnings are the accumulated profit that the company keeps. It is listed on a

balance sheet as a line item under stockholders' equity.

There can also be a loss, which is called negative retained earnings. It is subtracted from net

earnings in the following period. A company might intend to use retained earnings to pay off

debts or to expand its operations in ways that generate future income. Or it can simply be

kept as a reserve. Knowing how much profit to use to pay dividends and how much to keep

as retained earnings is part of good business management. Watching a company's retained

earnings per share over time can help determine if a company is handling its profits wisely.

󰗐Cash EPS

Cash EPS is operating cash flow divided by diluted shares outstanding. Cash EPS is

important because it is a purer number. That is, it represents real cash earned and it cannot

be manipulated as easily as net income.

A company with reported EPS of 50 cents and cash EPS of $1 is preferable to a firm with

reported EPS of $1 and a cash EPS of 50 cents. Although there are many factors to

consider, the company that has the cash is generally in better financial shape.

Objective of EPS

 Common shareholders need to know how much of a company’s available income can be
attributed to the shares that they own.
 This helps them assess future dividend pay-outs and the value of each share.
 Common shareholders have a residual interest in the company-The return on investment
is not based on a predetermined interest rate, the passage of time or face value (as it is for
 debt).

 Basic EPS looks at actual earnings and the actual number of common shares outstanding
(w/ this number prorated for the amount of time that the shares have been outstanding).
 Diluted EPS is a “what if” calculation that takes into account the possibility that financial
instruments such as convertible debt and options might have a negative impact on
existing shareholder returns and, hence, the share’s value.
 ASPE does not require EPS calls or disclosures in the f/s b/c of cost-benefit
considerations as well as the fact that these entities may be closely held.

Advantages of Earning per Share

 Reflect with Share price: the earning per share is one of the factors which has a
significant impact on the share price. A company with high EPS will have a higher
share price.
 Real profit for investors: EPS reflects a return to shareholders. This tool
accurately determines the amount of return that shareholders receive from their
investment in addition to capital gain.
  Easy to calculate: The calculation of EPS is simple and straight forward, we simply
take the total profit and divide it by the number of outstanding shares. Both figures
can be found in the financial statement.
 Measure company performance: it is one of the tools to measure company
performance. The higher the ratio, the better company is performing.

Disadvantages of Earning per Share

 EPS measure is that a company has a lot of discretion when deciding what is and so
the figure is open for manipulation.
 EPS will be distorted if any company conducts a share buy-back.
 EPS takes no accounts for a company debts position and financial leverage, factors
that an investor needs to be aware of.
  When we evaluate the company’s performance by using EPS, we completely ignore
the share price.
 Management can manipulate the earning by using different accounting treatments and
policies.

Case study: Dabur

Introduction
Dabur Ltd is an Indian multinational consumer goods company, founded by S. K. Burman and
headquartered in Ghaziabad, Uttar Pradesh It manufactures Ayurvedic medicine and natural
consumer products, and is one of the largest fast-moving consumer goods (FMCG) companies in
India.Dabur derives around 60% of its revenue from the consumer care business, 11% from the
food business and remaining from the international business unit.
The founder of Dabur India Ltd, Dr. S. K. Burman was born in a Hindu family. In the mid-
1880s, as an Ayurvedic practitioner in Kolkata, he formulated Ayurvedic medicines for
diseases like cholera, constipation and malaria. He went on to set up Dabur India Ltd in 1884
to mass-produce his Ayurvedic formulations. His son, C.L. Burman, set up Dabur's first R&D
unit. The current chairman, Dr. Anand Burman, and vice-chairman Amit Burman, are part of
the fifth generation of the family. They were among the first business families in India to
separate ownership from management, when they handed over the management of the
company to professionals in 1998.

Financial year 2020-21

 The basic EPS being 7.82

 The diluted EPS being 7.8