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Earnings per share
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles
(We recommend this as work of authority.)
For basic measures
of company profitability, dollar net income after income taxes can be
expressed relatively as percentage on sales, i.e., net profit margin,
or as percentage on equity, i.e., ROI or return on investment.
But for more specific
valuation per unit of investment (i.e., per share of common stock), net
income after income taxes and after dividends on the preferred stock,
if any, must be reduced by division by outstanding shares of the company
into earnings per share, the basic data used in publicity on company earnings,
in computing earnings growth over a past period, in projecting potential
future growth, and appraising relative market valuation by computing the
price-earnings ratio (market times earnings, or earnings as a percentage
of market price).
however, should not be attached to a single net income figure and to earnings
per share for a particular year (American Institute of Certified Public
Accountants, Accounting Research Bulletin No. 43, 1953).
Analysis should include the income statement as a whole, including
the sources of income and structure of costs, their comparative past record,
and the position and outlook for the corporation and its industry.
problems in presenting earnings per share include the following (see APB
Opinion No. 15, May, 1969).
Primary earnings per share, simple capital structures (only common
including no potentially dilative convertible
securities, options, warrants, etc.,
that could in the aggregate dilute over 3%
earnings per common share).
Weighted average number of common shares outstanding during
each period presented should be used, excluding
shares from date of acquisition.
Stock dividends, stock splits, or reverse splits (increasing
decreasing number of common shares) should
reflected for all past periods presented
so as to be comparable with
Acquisitions of firms accounted for as purchases and involving
issuance of shares should reflect the
additional shares only from the
acquisition date. Combinations of firms accounted for as poolings
of interests should reflect the aggregate
of the weighted average
outstanding shares of the constituent firms,
adjusted to equivalent
shares of the surviving firm, for all periods
In computing earnings per share, claims of senior securities
earnings for a period should be deducted
from net income and from
income before extraordinary (nonrecurring)
items if shown in the
Primary earnings per share, including common stock equivalents
structure is complex and there is dilative
A common stock equivalent is a security which is not in form
common stock, but which usually contains
provisions to enable its
holder to become a common stockholder and
which, because of its
terms and the circumstances under which it
was issued, is in
substance equivalent to a common stock.
The APB concluded that
a common stock equivalent is determined only
at the time of
issuance and should not be changed as long
as the security
Fully diluted earnings per share, to show the maximum potential
current earnings per share on a prospective
This concept includes senior stock or debt which is convertible
common shares but is not a common stock equivalent;
warrants; or agreements for the issuance
of common shares upon
the satisfaction of certain conditions, such
as the attainment of
specified higher levels of earnings following
The computation should be based on the assumption that all
issued and issuable shares were outstanding
from the beginning of
the period or from the time the contingency
arose, if after the
beginning of the period.
Previously reported fully diluted earnings per share amounts
not be retroactively adjusted for subsequent
amounts conversions or
subsequent changes in the market prices of
the common stock.
The rule is "one-way," i.e., fully diluted earnings per share
exclude those securities whose conversion,
exercise, or other
contingent issuance would have the effect
of increasing the earnings
per share amount.
Earnings per share
data are widely used in judging the operating performance of a business.
This ratio frequently appears in financial statements and business
publications. It is considered the most significant figure appearing on the
income statement because it condenses into a single figure the data reflecting
the current net income of the period in relation to the number of shares
of stock income from continuing operations and net income. Earnings per share may be reported for the results from discontinued
operations, extraordinary items, or cumulative effects of changes in accounting
principles if they are reported on the income statement.
Current accounting practice requires that earnings per share be
disclosed prominently on the face of the income statement.
OF CERTIFIED PUBLIC ACCOUNTANTS, ACCOUNTING PRINCIPLES BOARD, Opinion
No. 9, Reporting the Results of Operations, December, 1966.
Opinion No. 15,
Earnings per Share, May, 1969.
"A Critical Look at EPS."
Journal of Accountancy, August, 1985.
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