In its simplest form:
EARNINGS or (Net Income available to Common Shareholders) # Of SHARES (Weighted average number of Common shares outstanding)
If a company has senior shares (usually preferred shares) in addition to common shares, not all of the net income is available to be paid out to common shareholders.
If there are senior shares, the numerator is reduced by:
1. The current year’s dividend declared on non-cumulative senior shares, and
2. The current year’s dividend entitlement (whether declared or not) on cumulative senior shares
Note: participating shares are not considered to be senior shares for purposes of EPS calculations.
CICA REPORTING REQUIREMENTS
For companies that have common shares only, or common shares and non-convertible preferred shares, basic EPS presentation is required on:
Income before Discontinued Operations
and Extraordinary items (ie on Operating Income)$1.50 *
Loss from Discontinued Operations(0.09)
Extraordinary Item (Loss)(0.02)
Net Income$1.39 *
* Basic EPS figures on Operating Income and Net Income must be disclosed on the face of the Income Statement * Basic EPS figures on Discontinued Operations and Extraordinary Items must be disclosed, but may not be shown on the face of the Income Statement, in which case they are shown in the notes to the Financial Statements
Weighted Average of Common Shares Outstanding (WACS)
A company has 9,000,000 shares outstanding at the beginning of the year and issues an additional 3,000,000 shares on September 1 (year end is Dec 31).
9,000,000 outstanding Jan 1 – Sept 1 (8 months) 9,000,000 * 8/12 = 6,000,000
3,000,000 issued Sept 1
12,000,000 outstanding Sept 1 – Dec 31 (4 months) 12,000,000 * 4/12 = 4,000,000
WACS outstanding at Dec 31 year end 10,000,000
STOCK DIVIDENDS AND STOCK SPLITS
If shares are issued as the result of a stock dividend or a stock split, they are not weight-averaged. They are treated as if they were outstanding for the entire period (year). Restatement of EPS is required for prior years for comparative purposes.
If the stock dividend or split occurs after the end of the year (in the next fiscal period, but before the financial statements are issued) it is included in this year’s weighted average calculation. By the time the financial statements are released, the shareholders will be holding the new shares and the EPS data should be applicable to the new capital structure.
BASIC and FULLY DILUTED EPS
For companies with convertible securities (senior shares / debt) or equity contracts (options, rights etc.), both basic EPS and Fully Diluted EPS are required.
Income before Discontinued Operations and
Extraordinary Items $6.40 $2.56
Loss from Discontinued Operations (1.20) (0.48)
Extraordinary Items (Loss) (0.94) (0.38)
Net Income $4.26 $1.70
Fully Diluted EPS figures on Operating Income and Net Income must be disclosed on the face of the Income Statement. Fully Diluted EPS figures on Discontinued Operations and Extraordinary Items must be disclosed, but may not be shown on the face of the Income Statement in which case they are shown in the notes to the financial statements.
DILUTION / ANTIDILUTION
Dilutive securities:Convertible Securities and Equity
Contracts that cause EPS to DECREASE
eg Stock Options (in the money)
Anti-dilutive securities: Cause EPS to...