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EPS and Diluted EPS

May 9, 2013
To get to know what is earning per share and stuff related to that, let's understand the each term related to it.
  • Share: A part of a larger amount that is divided among a number of people, or to which a number of people contribute.
  • Dividends: A sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).
  • Assets: Property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
  • Security: Tradable assets of any kind.
  • Common Stocks: A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure
  • Preferred stocks: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
  • Voting Right: The right of a stockholder to vote on matters of corporate policy and who will make up the board of directors. Voting often involves decisions on issuing securities, initiating corporate actions and making substantial changes in the corporation's operations.
  • An annual general meeting is a meeting that official bodies, and associations involving the general public (including companies with shareholders), are often required by law (or the constitution, charter, by-laws etc. governing the body) to hold. An AGM is held every year to elect the board of directors and inform their members of previous and future activities. It is an opportunity for the shareholders and partners to receive copies of the company's accounts as well as reviewing fiscal information for the past year and asking any questions regarding the directions the business will take in the future.the number of votes that a shareholder has corresponds to the numbers of shares that he owns. For example, a shareholder that owns 100 shares will have a 100 times more sway than a shareholder that owns a single share.
  • Shares outstanding are all the shares of a corporation or financial asset that have been authorized, issued and purchased by investors and are held by them. They have rights and represent ownership in the corporation by the person that holds the shares.
  • Treasury shares: shares issued in the name of the corporation. The shares are considered issued, but not outstanding.Usually refers to stock that was once traded in the market but has since been repurchased by the corporation. Treasury stock not considered when calculating dividends or earnings per share.
  • Earning per share: The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Earnings Per Share (EPS) is one of the very commonly used measures of performance of a publicly traded firm and it is found using the income statement. If a company has a simple capital structure (meaning that there are no convertible securities or warrants or options), basic EPS is enough to know the per share income available to shareholders. However, if it has a complex structure, it will have some potentially dilutive securities and hence, both basic and diluted EPS should be looked at.These metrics are calculated as follows:clip_image006clip_image008 The concept behind this is to use the income available to “Common” stockholders in the numerator and the average number of outstanding shares in the denominator to get Earnings per share for a common shareholder. Buying stocks always poses the risk of losing money, but avoiding stocks altogether means missing out on the opportunity to make good profits. There is one security, however, that may help solve this dilemma for some investors: convertible preferred shares give the assurance of a fixed rate of return plus the opportunity for capital appreciation. Here we review what these securities are, how they work and how to determine when a conversion is profitable.
  • Convertible Preferred Shares:These shares are corporate fixed-income securities that the investor can choose to turn into a certain number of shares of the company's common stock after a predetermined time span or on a specific date. The fixed-income component offers a steady income stream and some protection of the investors' capital. However, the option to convert these securities into stock gives the investor the opportunity to gain from a rise in the share price.


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