Why is EPS so important?
Earnings per share is one of the most important indicators of a company’s performance.
- Can compare the EPS of different entities
- Can compare EPS in different accounting periods.
How can it be used to compute major stock performance indicators?
Price to Earnings ratio = (market value of share / EPS)
What is the ratio for Basic earnings per share?
Earnings (attributable for ordinary shareholders) / Shares.
Earnings are the net profit/loss for the period attributable to ordinary equity holders of the parent.
Shares are the weighted average number of ordinary shares outstanding during the period.
What are the effects of preference shares?
The existence of preference shares may affect the calculation of Earnings attributable to ordinary shareholders.
Redeemable preference shares?
Treated as a debt in financial statements and so finance cost will have been removed in P&L.
Irredeemable preference shares?
Treated as equity so dividend must be deducted from net profit in P&L, to get earnings attributable to ordinary shareholders. (company doesn’t buy them back at the end.
Cumulative preference shares?
This is when you should always pretend dividends have been paid in the correct period.
What happens when a firm issues shares at full market prices?
- when issuing new share capital at full market value it will increase share capital and earnings (not always proportionally)
- To calculate correct EPS figure, earnings should be divided by the weighted average equity of share capital.
What do you do about bonus issues?
- they are deemed to have been issued at the start of the year
- comparative figures are restated as if the bonus issue had always been in place
- when you have a bonus issue for EPS, pretend they have always been there.
What is a bonus issue?
- the issue of new shares to existing shareholders in proportion to their existing holdings.(no cash received)
- Issue needs to be funded from equity (assume share premium is used as its non-distributable)
What are the accounting entries for bonus issue?
Dr Share Premium (no. of shares x
nominal value)
Cr Share Capital (No. of
shares x nominal
value)
What are the properties of a bonus issue?
- shares offered to existing shareholders for free
- doesn’t provide additional resources to company by issuing them
- means shareholder owns the same proportion of business before/after the issue.
What is a rights issue?
- offer of new shares to existing shareholders in proportion to their existing at a stated price
- price usually below market value but above nominal
- accounted for the same as a normal issue.
- combined characteristics of issues at full market price and bonus issues as you’re giving away shares at a discount.
What happens when a company buys back shares?
- Dr Treasury Shares
- Cr cash
- share capital remains the same as they are a separate part of the entity.
- from an EPS perspective this will reduce the number of shares in issue. An adjustment is required to the weighted average number of shares.
