Revenue/Sales
Cost of good sold (COGS)
Gross profit
SGA expensese Selling exps Sales rep Salaries, Advertisement, commission, Travelling exps
R&D exps General exps Rent expenses, Telephones, electricity bill
D&A AdministrativePrinting
exps n stationary, maintenance, HK
Operatig exps
Operating Profit
+Interest income
+ Dividend income
EBIT - Earning before interest and Tax EBITDA = EBIT+D&A
-Interest exps (non operating expenses)
∆ One time/non recurring gains/losses
EBT/PBT
- Tax
PAT - Profit after tax
- Preference shares
- Minority shared
Net Profit for share holders
Net Profit for share holders
Basic EPS
/ No. of shares outstandings
(Net Profit for share holders– preferred dividends) /
(weighted average number of shares outstanding + the
Diluted EPS conversion of any in-the-money options, warrants, and
other dilutive securities)
Why do investors and analysts calculate diluted EPS?
The reason that analysts and investors calculate diluted EPS is that basic EPS may
overstate the actual amount of earnings per share that a common shareholder is
entitled to.
Companies frequently have dilutive securities outstanding like options and warrants
that will increase the total number of shares outstanding when converted.
Since the conversion of option into shares won’t add any additional net income to the
business, the increased share count makes the conversion dilutive.
Options may have been granted to employees, for example, that are in-the-money
(strike price is below the current market price) but have not been converted yet. If
options are in-the-money, they should be accounted for in a diluted EPS calculation.
Breaking down the numerator – net income and preferred dividends
The numerator of the EPS formula is Net Income – Preferred Dividends. Preferred
dividends need to be deducted from net income, since that portion of earnings will not
be available to common shareholders, and we are calculating the Earnings Per Share
(EPS) for common shareholders.
The standard calculation for Earnings Per Share is net income divided by shares
outstanding. In the case of a company that pays a preferred divided, the EPS for
common shareholders is Net Income less Preferred Dividends (since those get paid out
first) divided by shares outstanding.
Breaking down the denominator #1 – shares outstanding
The denominator of the EPS formula is Weighted Average Basic Shares Outstanding +
Options + Warrants + Other dilutive securities that are in-the-money.
The weighted average basic shares outstanding is the average number of shares that
were outstanding over the time period. If for example, the time period was one year
and no shares were issued or repurchased during the year, then the beginning number
of shares, ending number of shares, and weighted average number of shares are all
equal to each other.
Breaking down the denominator #2 – adjustments to shares outstanding
By looking at the notes in a company’s financial statements, you will find a schedule
with a list all the issued options and warrants, along with their strike or conversion
prices and maturity dates.
This is where most of the effort is required. A good financial analyst will recreate a
table in Excel with all the details, then compare the strike/conversion prices to the
current share price (or average share price over the period) and determine which
securities are in-the-money.
The next step is to assume those securities are converted, the company receives the
cash, and the number of shares outstanding goes up.
Should you use fully diluted shares outstanding?
It should be noted that you can take the fully diluted number of shares outstanding as
the denominator if you want to be the most conservative. It could be overly
conservative though, as some of the options may be far out-of-the-money and never
convert into shares. For this reason, it’s better to do take the steps
