EARNINGS PER SHARE

KEY ISSUES
 Basic EPS

 Weighted average no. of equity shares outstanding

 Dilution – ESOPs, Convertibles, Warrants

 Diluted EPS

 Options and Warrants: Treasury Stock method

 Convertible Bonds and Preferred Stock: if converted

method

 Determining dilution vs anti-dilution

BASIC EPS
 PAT or Net Income
 (-) Preference Dividends
 = Earnings available to
Equity Shareholders
 Basic EPS
 Earnings available to equity
shareholders / Weighted
average number of equity
shares outstanding
 Weighted Average number
of equity shares
outstanding
 Weights based on time with
respect to number of
shares outstanding at
different points of time
because of
 FPO & / or
 Share Repurchase & /or
 Conversion of bonds or
ESOPs exercise during the
year
BASIC EPS - EXAMPLE
 On April 1, 2018 ABC Ltd had:
 250,000 equity shares outstanding
 15,000 Preference shares, Rs 100 par value, 10% Preference
dividend
 Preference Dividend = 15,000 X 100 X 10% = Rs 1,50,000
 On October 1, 2018, the Co issued 50,000 additional
common shares
 On January 1, 2019, the Co repurchased 20,000 equity
shares
 Net Income (NI) or PAT for 2018-19 is: Rs 15,00,000
 What is the basic EPS?
 WEIGHTED AVERAGE NO. OF EQUITY SHARES OUTSTANDING
& BASIC EPS

Time Span Shares Outstanding Portion of the Year Time-weighted Shares

(1) (2) (3) (4) = (2 x 3)

April 1 to Sept 30, 2018 2,50,000 0.5 1,25,000

Oct 1 to Dec 31, 2018 3,00,000 0.25 75,000

Jan 1 to March 31, 2,80,000 0.25 70,000

2019
Weighted Average No. of equity shares outstanding 2,70,000

Basic EPS = (Rs 15,00,000 – Rs 1,50,000) / 2,70,000

= Rs 5 per equity share
DILUTED EPS
 Companies with complex capital structure to compute
and report diluted EPS
 Convertible Bonds outstanding
 ESOPs outstanding
 Warrants outstanding
 Diluted EPS
 =( NI – Preference Dividends + Income Adjustments
due to dilutive financial
instruments) divided
by

 Weighted Average No of equity shares outstanding + Newly

issuable shares due to dilutive financial instruments
DILUTED EPS
 Options & Convertible securities
 In-money (X < S, in case of call option), decrease EPS, dilutive
 Impact estimated
 Out-of-money (X > S in case of call option), Increase EPS, anti-dilutive
 Impact not considered

 Only diluted securities are included in computation of

Diluted EPS
 Dilutive effect of financial instruments on EPS
 starting with the instrument with the lowest conversion rate (i.e.
most dilutive); &
 working up to the instrument with the highest conversion rate
(i.e. least dilutive).
DILUTED EPS
 If-converted Method
 To measure potential dilutive effect on Basic EPS from
convertible bonds or convertible preferred stock
 Assumption: Convertible security has been converted (but they
have not been converted)

 Treasury Stock Method

 To capture potential dilutive effect on Basic EPS from ESOPs,
Options and Warrants
 Assumption:
 Options & warrants are exercised
 Cash received by the company because of exercise of options and
warrants is used to purchase its own stock at the average price of the
stock during the period
DILUTED EPS: IF CONVERTED METHOD
 XYZ Ltd had NI of Rs 12,50,000 during the FY 2018-19
 It had 9% Convertible Bonds Rs 25,00,000 outstanding convertible into
40,000 equity shares
 It had 2,50,000 equity shares outstanding
 Corporate Income Tax rate = 30%
 Basic EPS = Rs 12,50,000 / 2,50,000 = Rs 5 per share
 Diluted EPS: Two adjustments
 Assuming conversion of bonds into equity, hence interest @9% on Rs
25,00,0000 i.e. Rs 2,25,000 would not have to be paid are added back
after incorporating tax impact to NI for equity shareholders
 Assuming conversion of bonds into equity, the 40,000 equity shares that
would be issued upon conversion, are added to actual 2,50,000 equity
shares outstanding
 = (12,50,000 + 2,25,000 – 67,500)/(2,50,000 + 40,000)
 Rs 4.85
DILUTED EPS: TREASURY STOCK
METHOD
 PQR Ltd had NI of Rs 12,50,000 during the FY 2018-19
 It had ESOPs for 1,00,000 equity shares outstanding at X = Rs 25
 It had 2,50,000 equity shares outstanding & average stock price was Rs 40
 Basic EPS = Rs 12,50,000 / 2,50,000 = Rs 5 per share
 Diluted EPS: Two adjustments
 Assumption: ESOPs are exercised and co issued 100,000 equity shares
and received Rs 25,00,000 (1,00,000 x Rs 25) exercise price
 Assumption: Co used the cash proceeds of Rs 25,00,000 to buy 62,500
(Rs 25,00,000/Rs 40) its own equity shares
 Net effect is increase in outstanding shares by 37,500 (1,00,000-62,500)
 Diluted EPS = Rs 12,50,000 / (2,50,000 + 37,500)
 = Rs 4.35
DILUTED EPS: CONVERSION RATIO
 Conversion ratio
 = Income adjustments due to dilutive financial
instruments / Newly issuable shares due to dilutive
financial instruments

 Dilutive effect of financial instruments on EPS

 starting with the instrument with the lowest conversion
rate (i.e. most dilutive); &
 working up to the instrument with the highest conversion
rate (i.e. least dilutive).
 Warrants and ESOPs are most dilutive vis-à-vis
Convertible Bonds / Convertible Preferred Stock