EPS
is simply profit amount divided by number of shares. Valuing a company as a
whole is crucial during merger negotiations, buyouts or in similar
arrangements – relatively rare events in the ongoing life of a company. For
day-to-day valuations, many analysts prefer to focus on the value of single
equity share. Here the earnings per share (EPS) computation helps to know how
much of the company’s total earnings accrue to each share.
A
simple
capital structure exists when a company has no convertibles, no options
or no warrants outstanding. The simple formula used to compute earnings per share
(EPS) is:
To
illustrate, IStaR Ltd. discloses the following information in the year 2012:
January 1
|
December 31
|
|
Equity shares ( ` 1 face value)
|
||
160,000 shares
issued and outstanding
|
160,000
|
|
200,000 shares issued and outstanding
|
200,000
|
|
Reserves
|
12,000,000
|
16,000,000
|
Retained earnings
|
1,100,000
|
1,800,000
|
7% Preference shares
( ` 100 face value)
|
||
10,000 shares issued and outstanding
|
1,000,000
|
1,000,000
|
The
40,000 additional equity shares were issued on September 1 and thus were
outstanding for the last quarter of the year. The following factors explain the
movement in retained earnings during the year 2012:
Retained
earnings, January 1
|
1,100,000
|
Net income for the year
|
1,257,331
|
Preference dividend paid
|
(70,000)
|
Equity dividends
|
(487,331)
|
Retained earnings, December 31
|
1,800,000
|
The
denominator of the basic EPS computation uses the weighted average number
of equity shares outstanding. Since the additional shares were issued during
the year, the weighted average number of outstanding shares is computed as
follows:
Time
|
Shares
outstanding (a)
|
Portion
of the year
(b)
|
Weighted
average shares
(c)
= (a) * (b)
|
January 1 – August 31
|
160,000
|
2/3
|
106,667
|
September
1 – December 31
|
200,000
|
1/3
|
66,667
|
Weighted average outstanding shares
|
173,334
|
So
now Basic EPS will be:
= ` 6.85 per share
