Chapter 17

Earnings per Share

OVERVIEW

Earnings per share (EPS) is a widely quoted financial ratio used by shareholders and potential investors in evaluating a company's profitability and value. Calculation of earnings per share is more complicated if the entity has potential common shares such as convertible securities, options, warrants, or other dilutive securities that could dilute earnings per share if they are converted or exercised. This chapter examines how basic and diluted earnings per share are calculated, and discusses their usefulness in financial analysis.

STUDY STEPS

Understanding the Calculations Required in Preparing Earnings per Share Information

Basic EPS

EPS is residual income available to common shareholders stated on a per-common-share basis, and is an indication of the amount of income that each common share earned during the year. Therefore, EPS allows common shareholders to determine how much of the company's available income can be attributed to the shares that they own. EPS is not necessarily related to the amount of dividends paid out. Rather, it represents the amount of net income attributed to each common share after paying operating costs (including interest) and paying or allocating a return to shareholders who rank higher in preference (for example, preferred shareholders).

Calculation of basic EPS is as follows:

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Preferred dividends in the above ...

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