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How to Determine Earnings Per Share

How to Determine Earnings Per Share

Calculation of Earnings Per ShareEarnings Per Share is calculated by dividing the Net Profit or loss of the Period attributable to the equity shareholders of the entity by the weighted average number of equity shares outstanding during the period.

Earnings Per Share = Net Profit Attributable to Eq. Sharehold/Weighted Average No of Shares

Now we will take a example and understand the concept of the formula.

DateParticularsPurchaseSellBalance
     
01-01-16Beginning of year1,0001,000
31-05-16Issue of Shares5001,500
01-11-16Buy Back of Shares2001,300

Here we calculate the Weighted Number of Shares.

Weighted Average Number of Shares can be computed in two ways:

  1. WANS = (1000*5/12) + (1500*5/12) + (1300*2/12)
  1. WANS = (1000*12/12) + (500*7/12) – (200*2/12)

Here is the list from which you have to take the number of days for the Weighted Average Number of Shares.

List of SharesWeight to be Considered
Equity shares issued in exchange of cashDate of Cash Receivable
Equity shares issued as a result of conversion of debt instrumentDate of Conversion
Equity Shares issued in lieu of interest or principal amount on other financial instrumentsDate when interest ceases to accrue
Equity shares issued in exchange for settlement of a liability of other enterpriseDate on which the settlement becomes effective
Equity shares issued as consideration for the acquisition of an asset other than cashDate on which the acquisition is recognised
Equity shares issued for the rendering of the services to the enterpriseWhen the services are rendered.

The first example we took was of the fully paid up shares. Now we will see that how the calculation will be made in case of partly paid up shares.

If there are 3000 shares of Rs 10 each (Face Value), Rs 5 paid up than the weighted average formula for such shares should be calculated as under:

WANS = 3000 * (5/10) * (Number of months from issue/Number of months)

In case of the bonus shares or a share split, equity shares are issued to the existing shareholders without any consideration, so the number of share increases but without the increase in the paid up amount. Here the number of share has to be added but not in the paid up capital of the company.

In case of the right issue, the price at which the issue is open is mostly less than the fair value of the share, therefore the right issue has also a bonus element included in it. In such case the price of the right issue to be taken is the fair value immediately prior to the right issue. This factor is also known as ex-right fair value per share.

How to Determine Earnings Per Share

 

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