In its simplest form:
EARNINGS or (Net Income available to Common Shareholders) # Of SHARES (Weighted average number of Common shares outstanding)
THE NUMERATOR
If a company has senior shares (usually preferred shares) in addition to common shares, not all of the net income is available to be paid out to common shareholders. If there are senior shares, the numerator is reduced by:
1. The current year’s dividend declared on non-cumulative senior shares, and
2. The current year’s dividend entitlement (whether declared or not) on cumulative senior shares
Note: participating shares are not considered to be senior shares for purposes of EPS calculations.
CICA REPORTING REQUIREMENTS
For companies that have common shares only, or common shares and non-convertible preferred shares, basic EPS presentation is required on:
Income before Discontinued Operations and Extraordinary items (ie on Operating Income) $1.50 *
Loss from Discontinued Operations (0.09)
Extraordinary Item (Loss) (0.02)
Net Income $1.39 *
* Basic EPS figures on Operating Income and Net Income must be disclosed on the face of the Income Statement * Basic EPS figures on Discontinued Operations and Extraordinary Items must be disclosed, but may not be shown on the face of the Income Statement, in which case they are shown in the notes to the Financial Statements
THE DENOMINATOR
Weighted Average of Common Shares Outstanding (WACS)
Example:
A company has 9,000,000 shares outstanding at the beginning of the year and issues an additional 3,000,000 shares on September 1 (year end is Dec 31).
9,000,000 outstanding Jan 1 – Sept 1 (8 months) 9,000,000 * 8/12 = 6,000,000
3,000,000 issued Sept 1
12,000,000 outstanding Sept 1 – Dec 31 (4 months) 12,000,000 * 4/12 = 4,000,000
WACS outstanding at Dec 31 year end 10,000,000
STOCK DIVIDENDS AND STOCK