Earnings per share / Capital Included?

Question

In layman terms earnings per share is the profit the company makes / total no: of shares the company has floated .
Say a company makes 5 Million USD profit , and 50000 shares means 5/50k is the EPS . Am I correct ????
My question then is

1) if there are preferred shares then the profit percentage for preferred shares is deducted from computing the EPS .?

2) doesnt the capital of the company have any significance in computing EPS ?


Recently a company said it is diluting its real estate ( capital ) into business and caused a huge uproar in the stock of the company . they claim if you take the land price alone of the company - the value of the share would be 2000 INR instaed of 600 INR which it is trading today ...is this justified ? I mean real estate is a capital first of all and need not reflect in the profit of the company . Suppose company sells of the whole real estate then this is justified . But is it a reality ?

Answer 1

Hi Nishant - your knowledge of EPS is good. Please note the following:

In accounting and therefore the published results by companies, Earnings per share (EPS) = Net profit applicable to equity shareholders / Weighted average number of equity shares outstanding. Thus the net profit is after removing any amounts due to preferred stockholders, etc. The denominator is a weighted number of all shares issued and outstanding during the year.

To answer your question 1, preferred shares do not normally share in profits unless they are participating preferred shares. Company law has various categories of preferred stock and it will depend on the terms of the preferred stock issue if there need to be an amount set aside for preferred stockholders. So the answer will depend on the terms and conditions of the preferred stock issue.

Your second question is not very clear but I am hoping to help. I believe the 2000 INR value is the book value of the share (also called) net asset value of the share. This computation is a good measure of where it stands with the company's share market value. However note that the financials of a company are prepared on a historical cost basis and the EPS is also calculated on that basis. So if the property was bought at say 1000 INR in the past and today its market value is 3000 INR, the difference of 2000 INR cannot be recorded as a gain or a profit till the property is actually sold. Thus going back to your EPS calculation above, the net profit will not contain the unrealized gain on the property. Therefore as so many people have pointed out, the EPS is not really a good measure of finding out the true worth of the Company but is simply a measure of earnings computed per historical cost measures.

Answer 2

if there are preference shares dividend and attributable tax thereon is deducted from the earnings available to equity share holders. then the remainder is divided by the average number of equity shares outstanding during the year.
No. the capital of company does not have direct significance on the calculation of eps. it is the number of shares which determine the eps. suppose two companies with same profit and paid up capital. But first company's share is of 10 rs each while that of other is 100 rs each than eps will be different for them

if a company sells its assets the shareprice will not go up because selling of substantial assets will cause going concern problems and the company won't be able to be continue it s business in the long run.

Answer 3

Calculate the NAV of the company (excluding the pref. shareholders' recent&past dividend if there are cumulative preference shares).Divide this by number of fully paid equity shares(if all such shares are fully paid , otherwise, proprtionate valuation will have to be done, which is not found these days in practice).

Answer 4

please look dear that -
preferential shares through which equity capital will rise is not included in CALCULATION OF EARNING PER SHARE of a sript or company .

your 2nd question-
as u say about real state dear-you see real state price in country is on boom.
if any company which have big part of land if they sell today THEN PROFIT FROM SALE OF REAL STATE WILL BE INCLUDED IN RESULT OF COMPANY throgh which profit of company will hike in very big way. that's why INCREASE IN EARNING PER SHARE OF COMPANY ALSO INCREASE IN VERY BIG WAY. so with this posibility share PRICE of company which posses very big & high value land ARE RISING WITH SPEED

Answer 5

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