We'll conclude the series on the income statement tonight by briefly discussing the one item that gets all the love and attention from the financial publications and broadcasts these days, the darling of quarterly report, earnings per share (EPS).
Publicly traded companies are required each quarter to disclose how much income they earned. Earnings per share is simply the net income for a period, divided by the average number of common shares outstanding for that same period. EPS is the amount of income, on a per-share basis, that a company has at its disposal to invest back into the business or pay out to shareholders as a dividend. When calculating EPS, a company must factor the weighted average number of shares outstanding for the quarter or year. Weighted average means that consideration is afforded to both the number of shares outstanding and the amount of time each share was outstanding. The number of shares during a quarter often change due to new shares being issued or the retirement of shares.
EPS is presented as earnings per common share and is based on after-tax income from continuing operations, plus or minus discontinued operations, extraordinary items, and the cumulative effects of changes in accounting principles. EPS is also net of preferred stock dividends, if any have been issued.
Often you'll hear earnings reported as "pro forma." This simply means that the EPS has relinquished its amateur status and is ready for the major leagues. OK, that's not what it means at all. Pro forma statements describe what would occur if the company had operated in Marvel Comics' "What if?" universe. In other words, earnings showing the projected operating results if certain events or transactions are absent or present. An example of pro forma income might be earnings excluding one-time charges or expenses related to a business acquisition.
Another nuance of EPS reporting that often leads to confusion is the term "fully diluted EPS." Fully diluted means earnings are based on all common stock equivalents being converted into common stock. Common stock equivalents include convertible preferred stock, convertible bonds, and warrants. While fully diluted earnings are lower based on all convertible securities, adjustments are made by adding back interest expense from convertible bonds and dividends for convertible preferred stock to the bottom line. Fully diluted EPS can be very complicated, considering that it factors in the effect of every event as if it had happened.
With EPS, or pretty much any other income statement item, the trend from one period to an equal period year-over-year is crucial when evaluating a company's fiscal health. A company might have very sizable EPS, but if earnings are not growing at a good clip year-to-year, there's a good chance its share price will be similarly stagnant.
This finishes off the segment on the income statement. I hope it's been a helpful review of the basics on quarterly reports. In a few weeks, we'll continue the Back to Basics series with an introduction to the statement of cash flows.
Drip on, Fools!
Today's Buzzword: EPS
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
It's the time of year when everyone's talking about earnings per share. Vince Hanks demystifies EPS.
Invest Smarter with The Motley Fool
Join Over Half a Million Premium Members Receiving…
- New Stock Picks Each Month
- Detailed Analysis of Companies
- Model Portfolios
- Live Streaming During Market Hours
- And Much More
Motley Fool Investing Philosophy
- #1 Buy 25+ Companies
- #2 Hold Stocks for 5+ Years
- #3 Add New Savings Regularly
- #4 Hold Through Market Volatility
- #5 Let Winners Run
- #6 Target Long-Term Returns
Why do we invest this way? Learn More
Related Articles
Motley Fool Returns
Market-beating stocks from our award-winning analyst team.
Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 04/24/2024.
Discounted offers are only available to new members. Stock Advisor list price is $199 per year.
Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
Premium Investing Services
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.