What is EPS?

Earning per share (EPS) designates the net profit the company receives from every share. But the problem is how to calculate EPS if the company convertible instrument that could be changed into stocks any time.

If the issuer only issues common stock as the capital, the calculation of EPS will be very simple:

EPS = Net Profit/ outstanding shares

The problem is if the issuer issues all kinds of convertible instruments, that could be formed as the convertible preferred share, convertible bond, stock option and warrant. Although not all instruments are equity instruments, but sometimes they can be changed to common stocks, so that it can affect the amount of net profit per share.

Basic EPS

EPS only measures common stock, used for Basic EPS with formula:

Basic EPS = (Net Profit- Dividend Preference) / Common stocks based on weighted average

The meaning of weighted average common share is if the issuer only issues common stocks a couple of times in one year period, so that number of stocks should be averaged based on time.

For example: issuer PT XYZ booked net profit Rp 25B in the beginning of 2001 had 100M outstanding common stocks, and in the middle of the year, June 30 2001, 50M new stocks will be issued. PT XYZ does not own preference stocks. How much is the EPS in 2001 for PT XYZ?

Weighted average of common stocks= 100M + (50M x 0.5) = 125M.

Then, EPS = Rp 25B / 125M shares = Rp 200

Fully Dilluted EPS

For the company having all convertible instruments, the EPS measurement needs to use EPS fully diluted. The measurement assumes that the holder of convertible instruments has changed the convertible instruments to common stocks.

The formula:

Diluted EPS = [ Net Profit - Dividend pref. + Dividend for convertible pref.+ (Interest expenseconvertible debt x (1-t))] / [ Common stocks based on weighted average+ stocks from convertible instrument + stocks from convertible option and warrant]

t= tax rate charged to interest expense

As an example: issuer PT ABC owns 200M common stocks and 100M warrants with the convertible ratio 2:1 (3 warrants can be converted to 1 common stock). Thus, the stocks used as much as: 200M + (100M/2) = 250M shares.

It seems difficult ....but for more detail, please read the issuer's financial report, since usually it gives basic EPS and fully diluted EPS.

(F)