Earnings Per Share
What is Earnings Per Share?
All publicly held entities are required by the SEC and certain stock exchanges to disclose earnings per share in both basic and diluted forms. Earnings per share (EPS) represents the net income that is available to common stockholders, on a per share basis, allowing one to assess the entity’s performance.
Basic EPS is the net income per share that is available to common stockholders without taking into consideration the effect of dilutive securities, such as option grants or convertible preferred stock, and can be computed as follows:
Net Income: The net income figure above represents the total income available to common stockholders from continuing operations. If computing EPS in the consolidated financial statements, income from continuing operations should exclude the income attributable to the non-controlling interest in subsidiaries. (ASC 260-10-45-11)
Preferred Dividends: As dividends paid on preferred is income that will be distributed to only preferred shareholders, the dividend amounts paid and accumulated (whether or not earned) should be subtracted from income from continuing operations to arrive at the total income available to common stockholders. Preferred dividends that are cumulative only if earned are deducted only to the extent that they have been earned. (ASC 260-10-45-11)
Weighted Average Number of Common Shares Outstanding: Shares outstanding should include all common stock outstanding including any shares issuable for little or no cash consideration upon the satisfaction of certain vesting contingencies (contingently issuable shares). Contingently issuable shares should be included in the computation of basic EPS as of the date that all vesting conditions have been satisfied and when the shares meet any of the following:
1. The shares will be issued in the future upon the completion of specified vesting conditions.
2. The shares have been placed in escrow and all or part must be returned if the vesting conditions are not met.
3. The shares have been issued but the holder must return all or part of the shares if the vesting conditions are not met.
Computing the Weighted Average Number of Common Shares Outstanding: ASC260-10-55-2 provides guidance for calculating the weighted average number of common shares outstanding. The guidance states that companies can elect to use a weighted average measure that is based on the sum of the shares outstanding on a daily basis divided by the number of days in the period, or choose to use a less-precise averaging method so long as it produces reasonable results. Based on this, Carta provides two methods of calculating the weighted average number of common shares outstanding:
1. Weighted Average Method: provides the shares outstanding on a daily basis and multiplies the shares outstanding by the percentage of time during the period which the shares outstanding remained unchanged.
2. Simple Average Method: provides the average of the shares outstanding at the beginning of the period and at the end of the period.
Carta's report provides the shares outstanding for each day in the reporting period. The shares outstanding are obtained by Carta from our third party data provider, CapitalIQ. For North American companies and international companies with only one share class of common stock and no treasury stock, the shares outstanding number is provided to CapitalIQ by Interactive Data Corporation. For all other companies, the shares outstanding number is collected by CapitalIQ. It is Carta's understanding that the data provided from Interactive Data Corporation is obtained through stock exchanges, brokers, and fund houses. Additionally, it is Carta's understanding that this data represents the number of common shares outstanding known to the public at that time, that are participating in earnings such as restricted stock awards and released (or settled) restricted stock units.
Diluted EPS gives the net income per share that is available to common stockholders after taking into consideration the effect of potentially dilutive securities.
Net Income & Preferred Dividends: remain the same as stated above.
After-tax Interest on Convertible Debt: Convertible securities are reflected in Diluted EPS using the if-converted method which simply states that if the company has convertible securities outstanding at the end of the period, the company must factor in the convertible securities under the assumption that they converted at the beginning of the period or at the time of issuance, if later. This method assumes that interest paid on the convertible securities would not have been paid during the period had they converted at the beginning of the period. As a result, the after-tax interest paid during the period would be added back to the income from continuing operations that is available to common stockholders.
Weighted Average Number of Common Shares Outstanding: Computation of the weighted average number of shares outstanding for Diluted EPS is similar to Basic EPS with the exception of contingently issuable shares. For purposes of calculating Diluted EPS, contingently issuable shares are handled as follows:
- If the contingency period ended as of the reporting period end date, the contingently issuable shares should be included in the denominator for the entire period under the assumption that those shares would be issuable as of the reporting period end date.
- Awards subject to only time (service) based vesting are not considered contingently issuable.
- For contracts that can be settled in cash or shares, the numerator may need to be adjusted for any changes in income or loss that would result from the assumed settlement of the instruments in cash or shares.
New Common Shares Issued at Conversion Less Shares Repurchased: The number of new common shares issued at conversion includes the additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. This can include, but is not limited to, option grants, warrants, restricted stock, convertible debt, and convertible preferred stock. For public companies, Carta helps track equity such as option grants, warrants, and restricted stock. Carta then uses these ledgers to compute the diluted earnings per share. Typically, the convertible debt and preferred stock is tracked elsewhere for our public clients and may need to be manually added into the diluted earnings per share calculation. For all other types of equity, Carta handles their computation as follows:
- Options, Warrants, and Their Equivalents: Carta utilizes the Treasury Stock Method to calculate the dilutive effect of options, warrants, and non-vested stock. Under the Treasury Stock Method, the options, warrants, and their equivalents are assumed to be exercised at the beginning of the period and common stock issued in return. The proceeds from exercise are then assumed to be used by the company to purchase common stock in the open market at the average market price during that period. Under ASC 260-10-45-29, companies are also required to add to the proceeds from exercise, the amount of unrecognized compensation cost, net of forfeitures, for the awards that are assumed to be exercised.
Using the Treasury Stock Method, options and warrants will only be dilutive when their exercise price is less than the average market price during the period. Options or warrants that are exercised, granted, or canceled are included in the diluted earnings per share calculation for the period that they were outstanding.
Contracts that May Be Settled in Stock or Cash: According to ASC 260-10-45-45, the determination of whether the contract that may be settled in cash or stock should be included in the computation of diluted earnings per share should be made based on the facts available each period. For this reason, Carta’s diluted earnings per share report assumes all awards are settled in stock and may require manual adjustments to account for contracts that are assumed to be settled in cash.
Contingently Issuable Shares: Contingently issuable shares can include, but is not limited to, shares that vest based on the achievement of a performance condition. Many of these performance conditions are based on events that are outside of the corporation's control and unpredictable. For this reason, Carta's diluted earnings per share report assumes all performance based awards have not been achieved and are excluded in the diluted earnings per share calculation until the performance condition has actually been met and the shares have been vested.
- Carta's report have adopted FASB's ASU 2016-09 and excluded the computation of the tax benefit when accounting for the dilutive effect of options and warrants.
- Participating securities and the two-class method are excluded when computing the basic and diluted earnings per share. Adjustments may need to be recorded offline in the excel export.
- Preferred stock and convertible debt may be more readily available off the Carta platform. As such, convertible preferred stock and convertible debt are excluded from the diluted earnings per share report and may require adjustments to be made offline in the excel export.