Earnings Per Share calculation involving Rights Issue

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Earnings Per Share calculation involving Rights Issue

Postby SHARK » Sun Mar 11, 2018 11:17 pm

Rights Issue - Definition
Rights issue involves the issue of shares to existing members in proportion to their respective shareholding in the company. For example, a 'one for three rights issue' would entitle shareholders with one new share for every three shares that are already held in the company. Shares issued in a rights issue normally have an exercise price below the prevailing market price of similar shares.

Rights Issue Adjustment - Rationale
Rights issue necessitates adjustment in Earnings Per Share calculation. This is because rights issues involve an element of bonus shares where the exercise price is set below the market price. As with the EPS calculation involving bonus shares, the effect of bonus shares in the EPS calculation must be cancelled by inflating the number of weighted average shares by the number of bonus shares in the period in which rights issue takes place and as well as for any prior period comparatives presented without any time apportionment.

If no such adjustment is made in the EPS calculation in respect of the bonus element in a rights issue, the performance of an entity may be unnecessarily penalized in the year in which rights issue takes place.

Shares deemed to be issued at the fair market value in a rights issue are accounted for in the EPS calculation in a similar manner to the EPS involving shares issued for full consideration (i.e. included in the weighted average shares from the date of the issue).

Formulae
Following formulae illustrate how rights issue adjustment is incorporated in the Basic EPS calculation:
ri.png


Example
ABC PLC, which has a year end of 31st December 2012, issued 1 for 3 rights shares on 30th June 2012. The exercise price for shares was $1.5 whereas the market price of ABC PLC shares just prior to the issue of rights shares was $2. All rights were exercised on 30th June 2012.

Following information relates to ABC PLC:

Ordinary Shares as on 1st January 2011 - 3,000,000

Earnings attributable to ordinary shareholders:

2011   $6,400,000

2012   $7,200,000

Calculation of Earning Per Share for 2011 and 2012 for presentation in financial statements for the year ended 31st December 2012 would be as follows:
1.png

2.png

ABC PLC's EPS for the two years show that its profitability has remained constant over the period and the level of earnings have increased in line with the increase in company's resources from the rights issue.

If the EPS calculation ignored the bonus element, EPS for the two years would be as follows:

2011   EPS   ($6,400,000 / 3,000,000)     $2.13

2012   EPS   ($7,200,000 / 3,500,000)     $2.06

Clearly the decline in the EPS as presented above does not reflect the trend in the profitability of ABC PLC as the calculation ignores the fact that 20% of the shares issued in the rights issue were effectively free of cost to the owners (i.e. bonus share). It is for this reason that it is necessary to incorporate the effect of the bonus element involved in rights issue in the EPS calculation.
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Re: Earnings Per Share calculation involving Rights Issue

Postby SHARK » Mon Mar 12, 2018 9:28 am

This post was made yesterday for LDEV holders :) to understand.
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Re: Earnings Per Share calculation involving Rights Issue

Postby matrix » Tue Mar 13, 2018 7:35 am

Good clarification shark :ymhug:
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Re: Earnings Per Share calculation involving Rights Issue

Postby SHARK » Thu Apr 26, 2018 10:55 pm

how many companies do this exercise in the right manner !
we will see more in this when the reports for Q12018 are out :)
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Re: Earnings Per Share calculation involving Rights Issue

Postby IOSirisena » Fri Jun 01, 2018 3:03 pm

Cash Earnings Per Share - Cash EPS


What is 'Cash Earnings Per Share - Cash EPS'
Cash earnings per share (cash EPS), or more commonly called operating cash flow, is a financial performance measure comparing cash flow to the number of shares outstanding. Cash EPS differs from the more popular net profit measure, Earnings per share (EPS), which compares net income on a per share basis.

Free of non-cash components, such as depreciation which is included in profit based EPS measures, Cash EPS may prove a more reliable gauge of financial and operational health.

The higher a company’s cash EPS, the better it is considered to have performed over a period. A company's cash EPS can be used to draw comparisons to other companies or trends in a company’s business.

BREAKING DOWN 'Cash Earnings Per Share - Cash EPS'
When analyzing a company, a standard financial analysis technique compares cash flow from operations (CEPS) to reported net income. A common warning sign for aggressive revenue recognition often surfaces when operating cash flow starts to lag behind reported net income materially. When this happens, it may be a red flag for recognizing revenue too soon.

Being rather susceptible to accounting manipulation, basic EPS can be an unreliable measure of performance. As such, when evaluating a potential investment, investors such as Warren Buffet prefer cash based measures to guide their analysis.

More recently, stock buybacks, rather than stock dividends, have been an overwhelming popular method to return profits to shareholders. An argument can be made this helps increase EPS, by reducing shares outstanding, thereby helping corporate executives game earnings per share growth to juice performance-based compensation plans.

Being a more conservative measure of performance, cash EPS can eliminate some of these issues common to the greater use of financial engineering.

Benefits of Using Cash Earnings Per Share - Cash EPS
CEPS is less prone to accounting manipulation, which offers a clearer picture of cash flow and real earnings. Added transparency is a sign of good corporate governance.
CEPS shows investors on a per share basis how much profit each share generates. This helps identify incremental value.
CEPS is not subject to the same short-term market focus seen with EPS.


Read more: Cash Earnings Per Share - Cash EPS https://www.investopedia.com/terms/c/ca ... z5HAEc3tUb
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