Definition and Importance of Earnings Per Share

Earnings Per Share is a fundamental financial indicator that measures each share's portion of net profits achieved during a specific period (usually one year). It's considered one of the most important metrics for evaluating a company's financial performance and ability to generate profits for shareholders. It's calculated by dividing net profit after taxes by the weighted average number of outstanding common shares, expressed in monetary units (dollars, riyals) per share.

Formula: Net Profit ÷ Outstanding Shares = Earnings Per Share

Importance: A fundamental measure for evaluating company performance and comparing it with other companies. Investors use it to make investment decisions and calculate valuation ratios like the price-to-earnings multiple.

Difference Between Earnings Per Share and Dividend Distributions

Earnings per share represents each share's portion of the company's total net profits achieved during the year. It's an accounting indicator for measuring financial performance calculated by dividing net profit by the number of outstanding shares. Dividend distributions, however, are the actual cash amount the company decides to pay shareholders from these profits - an optional decision made by the board of directors. The fundamental difference is that EPS is a theoretical shareholder right to achieved profits that isn't received in cash, while dividend distributions are actual amounts paid to shareholders in cash or stock. For example, if EPS is $10 and the company distributes $4, then $6 remains retained by the company for future growth and expansion.

How to Interpret Earnings Per Share

Advanced Interpretation: The absolute value of EPS reflects a company's ability to generate profits, but real analysis requires multiple comparisons. Time-series comparison over 3-5 years reveals annual profit growth rates and performance stability. Sector comparison is essential because $5 EPS might be excellent in banking but weak in technology. Trend analysis shows whether growth is sustainable or volatile, and compound annual growth rate measures long-term performance.

Calculating Earnings Per Share and Influencing Factors

Basic Formula: EPS = Net Income Available to Common Shareholders ÷ Weighted Average Number of Outstanding Common Shares

Formula Components:

Available Net Income: Profits after deducting taxes, preferred stock dividends, operating and non-operating expenses. Sometimes excludes extraordinary items.

Weighted Average Shares: Calculated based on the period each quantity of shares remained outstanding during the year. Shares issued mid-year count as half-weight.

Excluded Shares: Treasury shares, suspended shares, preferred shares.

Practical Example:

Company with net profit of $5 million, preferred stock dividends of $200,000:

• Available net income = $5,000,000 - $200,000 = $4,800,000
• Outstanding shares: January 1st 800,000 shares, issued 200,000 on July 1st
• Weighted average = 800,000 + (200,000 × 6/12) = 900,000 shares
• EPS = $4,800,000 ÷ 900,000 = $5.33

Dividend Calculation and Distribution Schedule

Distribution Timeline: Dividend distribution follows a predetermined timeline that the company announces to shareholders and the market.

Important Dates:

Declaration Date: The date the board of directors announces the distribution decision, specifying the amount and subsequent dates. Sent to the market and regulatory authorities.

Record Date: The last day for registered shareholders in company records to be eligible. Share ownership must be maintained until this date's close.

Ex-Dividend Date: Begins two business days before the record date. Shares purchased from this day forward are not eligible for dividends.

Payment Date: The actual date dividends are deposited into shareholders' accounts, usually within two weeks of the record date.

Example: Declaration May 1st, record date May 15th, ex-dividend May 13th, payment May 30th.