Uses of Earning per

shareEPS is used

particularly by

investors and

analysts to assess

the performance of a

company over a

period of time , and

to compare the

performance of a

company with that of

other companies.

Calculation basic EPS?

Formula

N/P – Prefer. DividendNo of Equity SharesBasic EPS =

If a company X has 100,000 equity shares and 50,000 , 10 percentage cumulative preference shares.The company has reported a net profit after tax of Rs 5lk for the year ended march 31, 2014.

SolutionProfit : 500,000Outstanding equity : 100,000

Using formula :-

NP – Preference DividendBasic EPS = No of Equity Shares

500,000 - 5,000 = 4.95Rs.100,000

EXAMPLE

Changes in equity capital?

Calculating EPS based on weighted-average number

of shares

Company X have 100,000 outstanding common shares for 9

months and due to issuing new common stocks, has 120,000

outstanding shares for the remaining 3 months.

solution

The weight for 100,000 share would be 9/12(.75) and the

weight for 120,000 shares would be 3/12(.25).

To calculate the weighted average :

(.75)100,000 + (.25)120,000 = 75,000 + 30,000 = 105,000

EXAMPLE

Diluted earning per share

Dilution is the reduction in EPS if the securitiesconverted into common stock .In simple words we can say that Diluted EPS is aperformance indicator used to measure the qualityof a company's earnings per share (EPS) if allconvertible securities like options, warrants,convertible preferred shares etc. were exercised.

EXAMPLE

Trident company has 100,000 equity shares and 1000 of10 percent debentures of Rs 100 convertible into 10 equity shares of each. For the year ended march 31, 2014, the company has a profit after tax of Rs 500,000 and income tax rate is 35%.Calculation of the company's basic earning per share as follows.

Basic earning per share = Rs 500000Rs 100000

= Rs 5

Number of equity share

Equivalent number of equity shares of convertible debentures ( 1000 x 10)

Number of equity share for calculating diluted earning per share

Profit after tax

Add Debenture interest after tax( 1000 x 100 x 10 % x 65 %)

Adjusted profit for diluted earning per share

Diluted earning per share: (506,500/110,000)

= 100,000

= 10,000

= 110,000

= 500,000

= 6500

= 506,500

= 4.61

Calculation of Diluted EPS

As a result of dilution. There is a decrease of 39 paise in tridents earning per share