1. Investment ratios Earnings per share ( EPS )
earnings available for ordinary shareholders
number of ordinary shares issued

2. EARNINGS PER SHARE [ IAS 33 ]
WHY EPS?
Due to use of P/E ratio as a standard stock market indicator
Therefore earnings per share should be calculated on comparable bases
Worldwide use despite the fact that internationally not comparable due to differences in tax systems

3. EARNINGS PER SHARE WHAT IS P/E RATIO?
Market capitalisation of a company's earnings
Price Per Share
EPS
Price identified on a consistent basis between companies and over time
So 'essential ?' that EPS calculation also consistent

4. EARNINGS PER SHARE WHAT IS EPS? Profit attributable to ordinary shares
Number of ordinary shares in issue

5. EARNINGS PER SHARE consolidated tax minority preference extraordinary
profit interests dividends items
after after after before
Number equity in issue and ranking in respect of
of shares for dividend the period
weighted
average
number in issue and ranking

6. EARNINGS PER SHARE WHAT ARE THE PROBLEMS?
Identification of the earnings figure due to taxation anomalies
Identification of the number of shares in issue
particularly when additional shares issued during the year

7. EARNINGS PER SHARE E.P.S & TAXATION charge: VARIABLE ITEMS
elements of tax charge which vary according to the amount of profit distributed by way of dividend
eg. deferred tax ?
CONSTANT ITEMS
eg.
corporate tax on income
tax attributable to dividends received
overseas tax unrelieved because the rate of overseas tax exceeds the rate of reporting entity corporate tax

8. EARNINGS PER SHARE BASES OF COMPUTING EPS NET BASIS:
Takes account of both variable and constant tax items
this is the one that is used
NIL BASIS:
Takes account only of constant items

9. EPS AND THE NUMBER OF SHARES
1. NO CHANGE IN ISSUED CAPITAL DURING THE YEAR
Number of shares as at balance sheet date
2. SHARES ISSUED AT FULL MARKET PRICE DURING THE YEAR
Time weighted average calculation to reflect change in the number of shares
NO previous year adjustment

10. EPS AND THE NUMBER OF SHARES
3. CAPITALISATION / SCRIP / BONUS ISSUE
DURING THE YEAR
Earnings apportioned over number of shares after capitalisation
ie. number at end of year, (at balance sheet date)
scale down previous year EPS figure
4. SHARE SPLIT DURING THE YEAR
Calculation as in 3. above

11. EPS AND THE NUMBER OF SHARES
5. SHARE EXCHANGE DURING THE YEAR
As consideration for shares in a new subsidiary
IF ACQUISITION ACCOUNTING
Profit of subsidiary is brought in from date of acquisition
Therefore number of shares time weighted average based on time of acquisition as in 2. above
No previous year adjustment to EPS

12. EPS AND THE NUMBER OF SHARES
RIGHTS ISSUE
Normally at less than full market price
use a CALCULATED
THEORETICAL EX RIGHTS PRICE [TERP]
number of shares before rights x cum-rights price = $X
+ number of rights shares x rights issue price = $Y
= combined number of shares at a combined price = $Z
so TERP = combined price / combined number

13. EPS AND THE NUMBER OF SHARES
EPS FOR THE YEAR IN WHICH A RIGHTS ISSUE IS MADE
Number of shares is an adjusted weighted average
Number
of shares before rights issue
Time in period before issue
Actual cum rights price
TERP +
of shares after rights issue
Time in A.P.
after
issue
and this "adjusted" number of shares figure
is used to divide into earnings

14. EPS AND THE NUMBER OF SHARES
EPS FOR PRIOR YEARS
multiply old EPS figures by:
TERP
‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑
Actual cum rights price
Actual cum rights price on the last day of quotation of the shares cum rights.
ie.Closing price on last day being the official middle market quotation published on the following day

15. WHEN SHARES IN THE FUTURE WILL RANK FOR DIVIDEND
DILUTED EPS
WHEN SHARES IN THE FUTURE WILL RANK FOR DIVIDEND
1. Shares already issued but not yet ranking for dividend [ie. a separate class of equity shares]
2. Convertible securities
[loan stock and preference]
3. Options or warrants granted to subscribe for equity shares

16. DILUTED EPS EARNINGS WILL HAVE TO BE SPREAD
OVER A LARGER NUMBER OF SHARES
Assume dilution/conversion/subscription
occurs on first day of period or date of issue if later
IF CONVERTIBLE LOAN STOCK
earnings will increase
by assumed saving of interest, net of corporate tax
IF NEW SHARES UNDER OPTIONS/WARRANTS
earnings adjusted by assuming subscription proceeds had been invested in 2.5% consolidated stock on first day of period at the closing rate of the previous day
Again extra earnings net of tax. ie. return on capital

17. DILUTED EPS
FULLY DILUTED earnings per share should be shown on the face of the profit and loss account in addition to the BASIC earnings per share on a NET BASIS
If DILUTION is less then 5% of BASIC EPS no need to disclose

18. EPS EXAMPLES company year end 31 October 19..
earnings for the year £200,000
share capital at 01 November 19..
consisted of £2 million ordinary shares
No change in issued capital
EPS = 200,000 = 10p
2 million

19. EPS EXAMPLES
500,000 ordinary shares issued at full market price for cash on 1 August 19..
Weighted Average 2m x 9/ m x 3/12
= 1,500, ,000
EPS = 200, = 9.4p
2,125,000
No previous year adjustment
Assume that additional capital earns same return as original

20. EPS EXAMPLES 3. 1 million bonus shares issued during the year
(timing is irrelevant)
EPS = 200,000 = 6.7p
3 million
Scale down previous year
4. Share spilt ie. £1 shares become 50p shares
EPS = 200,000 = 5p
4 million

21. EPS EXAMPLES 5. Share Exchange 500,000 shares issued on 1 August 19..
Assume profits of subsidiary since acquisition included in earnings figure
Weighted Average 2m x 9/ m x 3/12
= 1,500, ,000
EPS = 200, = 9.4p
2.125 million
No adjustment to previous year

22. EPS EXAMPLES 6. Rights Issue
500,000 ordinary shares at 115p per share on 1 May 19..
Market price last day cum rights was 125p per share
(2m x 125p) + (0.5m x 115p)
TERP = ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑ = 123p
2.5m
4 x 125p = 500p
1 x 115p = 115p
‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑ p
====
therefore = 123p
200,000
EPS = ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑
( 2m x 6/12 x 125/123 ) + ( 2.5m x 6/12 )
so EPS = 8.8p
Adjust previous year EPS by factor 123/125