EARNINGS PER SHARE (EPS) - BASIC

EPS is simply profit amount divided by number of shares. Valuing a company as a whole is crucial during merger negotiations, buyouts or in similar arrangements – relatively rare events in the ongoing life of a company. For day-to-day valuations, many analysts prefer to focus on the value of single equity share. Here the earnings per share (EPS) computation helps to know how much of the company’s total earnings accrue to each share.

A simple capital structure exists when a company has no convertibles, no options or no warrants outstanding. The simple formula used to compute earnings per share (EPS) is:

To illustrate, IStaR Ltd. discloses the following information in the year 2012:

	January 1	December 31
Equity shares ( ` 1 face value)
160,000 shares issued and outstanding	160,000
200,000 shares issued and outstanding		200,000
Reserves	12,000,000	16,000,000
Retained earnings	1,100,000	1,800,000
7% Preference shares ( ` 100 face value)
10,000 shares issued and outstanding	1,000,000	1,000,000

The 40,000 additional equity shares were issued on September 1 and thus were outstanding for the last quarter of the year. The following factors explain the movement in retained earnings during the year 2012:

Retained earnings, January 1	1,100,000
Net income for the year	1,257,331
Preference dividend paid	(70,000)
Equity dividends	(487,331)
Retained earnings, December 31	1,800,000

The denominator of the basic EPS computation uses the weighted average number of equity shares outstanding. Since the additional shares were issued during the year, the weighted average number of outstanding shares is computed as follows:

  

Time	Shares outstanding (a)	Portion of the year (b)	Weighted average shares (c) = (a) * (b)
January 1 – August 31	160,000	2/3	106,667
September 1 – December 31	200,000	1/3	66,667
Weighted average outstanding shares			173,334

So now Basic EPS will be:

      = ` 6.85 per share