Earnings per share (EPS) is considered to be one of the best measures to summarize the performance of a company. The EPS for a company is reported only for common stock.
A company can have simple capital structure or complex capital structure.
- A company with a simple capital structure can only have common stock, nonconvertible debt and non-convertible preferred stock. It cannot have any potentially dilutive securities (i.e., stock options, warrants, convertible bonds, and convertible preferred stock). For companies with simple capital structure, we calculate the Basic EPS.
- A company with a complex capital structure also includes convertible securities, stock options and warrants. For these companies, we calculate both Basic EPS and Diluted EPS. The diluted ESP considers the impact of potentially dilutive securities.
The basic EPS is calculated as follows:
A company has net income of $1 million. It paid dividends of $100,000 to its preferred shareholders and also paid dividends of $200,000 to its common shareholders.
The company had 12,000 shares of common stock outstanding on January 1. On March 1, it issued 2700 shares; on July 1, it issued another 3,300 shares; and on December 1, it acquired 480 shares as treasury stock. The weighted average number of common shares is 15,860 shares as calculated below:
The Basic EPS of the company will be:
In the next article, we will look at the impact of stock dividends and stock splits on earnings per share (EPS).