Basic earnings per share is calculated by dividing the net profit or loss on continuing operations by the weighted average number of ordinary shares in issue during the period.
EPS = Net profit or loss attributable to ordinary shareholders during a period / by the weighted average number of ordinary shares in issue during the period.
The net profit (or loss) attributable to ordinary shareholders is calculated as:
- the profit or loss from continuing operations
- minus any tax and preference dividends
Also, if the accounts are consolidated, exclude the earnings attributable to the non-controlling interests or minority interests.
So we take the net income and then take away any preference shareholder payments for the period.
When we’re looking at the basic earnings per share, we’re looking at it from the viewpoint of the basic, standard ordinary shareholder. What profit is attributable to them?
Total earnings include any income from associates (i.e. any share of profits of associates).
EPS and No Profit
What if the company makes a loss for the period, should it still present an EPS figure?
Yes.
Even if there is a loss, an EPS must be calculated which will show a negative figure.
EPS and Continuing Operations
When calculating EPS we calculate earnings on continuing operations.
If there are any discontinued operations in the entity, the EPS from this discontinued operation may also be calculated, but does not have to be disclosed on the face of the Statement of Comprehensive Income.
Preference shares and EPS
Preference shares are not ordinary shares.
Since EPS is a measure of earnings per ordinary share in a financial year, preference shares are excluded from the number of shares.
When someone has preference shares, they’re a preferred shareholder and will get paid before the ordinary shareholder when it comes to dividends.
The dividends paid out to preference shareholders should be excluded from the net earnings in the period.
A broad definition of ‘earnings’ is the net profit after tax less any preference dividends paid.
Cumulative and Non-Cumulative Preference Shares and EPS
Now one thing to watch out for is whether the preference shares are cumulative or non-cumulative.
If they’re cumulative then if the company doesn’t pay a dividend this year, the amount they should get paid this year will also be owing next year and so on until they actually get paid.
It keeps building up and up until they actually get paid.
If it’s non-cumulative, then once it’s gone, it’s gone.
If they don’t get paid this year, tough luck, they might get paid next year.
For the purposes of calculating the basic EPS, if there’s a non-cumulative preference share, and no dividend declared, you can ignore it.
If the preference shares are cumulative – we take out the preferential dividend whether it has been paid or not, but only for this year.
Because we have to be fair, we can’t take it out again from next years figures if we’ve already taken it from this years.
It would be double counting.
Calculating Earnings
Earnings = Net Profit after tax – Preferred dividend
Then we divide it all out by the weighted average number of ordinary shares outstanding.
Let’s look at how to calculate this.
The top is called the numerator, and the bottom is called the denominator (d-d-d-down)
Numerator is the amount of money in euros or GBP, and the bottom is the number of shares, and use the weighted average number of ordinary shares in issue during the period.
Let’s look at an example.
Example
- In the year ended 31 December 20X3, Piglet Limited made a net profit after tax of €500,000.
- Of this, €450,000 was from continuing operations and €50,000 was from discontinued operations.
- It paid ordinary dividends of €200,000 and preference dividends of €60,000.
- Throughout the year, it had 1 million ordinary shares in issue.
Required
- Calculate the basic EPS for Piglet Limited for the year ended 31 December 20X3.
Answer
- €450,000 – €60,000 / 1,000,000
- = €0.39 or 39c per share