09 October 2012
I want to know that if we want to calculate the EPS then what is the exact formula for that, whether if in a company there are both Equity and Preference Shares then whether we have to include both in the calculation or only Equity Shares is to be included. Secondly, what is the basis difference between Basis EPS & Diluted EPS. Thirdly, if in the company issued share capital is different from paid up & subscribed capital then in calculation of EPS which has to be taken.
EPS = net profit/loss attributable to equity share holders / Weighted avg num of equity shares
EPS explains earnings per equity share. so we should not consider preference shares while calculating avg num of equity shares and div on preference shares should be reduced from net profit for calculating EPS. basics EPS gives current earnings available to equity share holders where as diluted EPS gives future earnings that will be attributable to present equity share holders paid up & subscribed share capital should be considered.
11 October 2012
Basic EPS simply put is the EPS which accrues to the shareholders of the company. This is derived by dividing the net profit (after deducting dividend on preference shares) of a company by the total number of shares outstanding. So if the net profit of a company is Rs 100000and the shares outstanding are 2000 the EPS of the company is Rs 100000 / 2000 = Rs 50. whereas diluted EPS which is a little more complicated than basic EPS. Diluted EPS is important when evaluating companies. Assuming a company needs to raise debt and it realises that it would be able to get cheaper debt by issuing convertible bonds rather than plain vanilla bond or it decides to reward its employees with stock options instead of bonuses. In these cases, when the convertible bond is converted or stock option is purchased, it will result in increase in number of shares for the company. For existing shareholders this will result in a lower EPS accruing to them. So a diluted EPS gives what the EPS of a company would be if all convertible bonds, convertible warrants, convertible preference shares and stock options outstanding on the company’s books are converted into shares. This will give the equity share holder the correct picture when investing in the company.
Hence diluted EPS = net profit ÷ number of shares adjusted for future dilutions.
However, there are certain points to be noted when calculating diluted EPS.
Firstly, when accounting for convertible bonds, after tax interest expense is not considered an interest expense for diluted EPS. Hence interest adjusted for tax should be added back to the net profit.
Secondly, in case of convertible preference shares, the dividend has to be added back to the net profit.
thus, The basic EPS figure is the total earnings per share based on the number of shares outstanding at the time. The diluted EPS figure reveals the earnings per-share a business would have generated if all stock options, warrants, convertibles, and other potential sources of dilution that were currently exercisable were invoked and the additional shares printed resulting in an increase in the total shares outstanding.
CAclubindia
