Earnings Per Share--Not So Straightforward

There are at least five different ways to calculate earnings per share (EPS). It is important to compare apples to apples when selecting a stock because a company can choose the model that is most favorable to its independent situation. This can mislead investors into believing the company is posting a better EPS than its competitor.

Reported EPS

The reported EPS is the EPS calculated according to basic Generally Accepted Accounting Principles (GAAP) and reported to the Securities and Exchange Commission (SEC.) Even though GAAP is designed to make it difficult to manipulate EPS, there are some features that can distort the reported number. For example, a one-time sale of machinery can be counted as operating income, and it can therefore cause a temporary spike in EPS even though the company's profits did not actually go up.

Ongoing EPS

Ongoing EPS does not account for one-time spikes. Here, the goal is to provide EPS measurements based on a consistent income stream and expense sheet. If a company has a one-time sale or abnormal loss, it may not report the incident on the ongoing EPS calculation. Ongoing EPS may paint a clearer picture than reported EPS, but the swings go both ways. A major loss could be omitted just as easily as a major gain.

Pro Forma EPS

Pro forma EPS is very similar to ongoing EPS. In this model, a company chooses to report or neglect to report items that may not be ongoing. For example, a company may sell a division for a one-time profit. Since this does not represent ongoing income, it will not be reported. Along the same line, however, a one-time lawsuit may also be excluded from pro forma EPS. The management may feel there is no recurring expense associated with this single event.

Headline EPS

A headline EPS is a figure reported by the media. This EPS should not be used when determining whether to purchase stock in a company because it is not an official number. This may be provided by an analyst outside the company reviewing the financials. Similarly, it may be released by the company to boost PR, knowing the company will not be held accountable to this figure. If you are reading a financial report, such as the company's annual report, the EPS is not a headline EPS. This term refers more to the figure that is casually mentioned by a news source when speaking of the company without reference to how the EPS was actually calculated.

Cash EPS

Cash EPS is often the best indicator of true EPS. It accounts for diluted earnings per share based on shares outstanding. It accounts only for operating cash flow and not net income. Historically, cash EPS has not been given much weight. However, changes in GAAP may make this option a more desirable reporting statistic than other forms of EPS in the future. When comparing cash EPSs, the company with the higher figure will generally be on more solid financial ground because it has a higher operating income, meaning it has more liquidity to overcome short-term slowdowns in the market.

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