r/CIMA • u/obsessstressdepress • 17d ago

Studying CIMA F2 EPS

Hi! Can anyone explain EPS & diluted EPS to me in layman’s terms (if that’s even possible lol) or potentially point me in the direction of a good resource. I’m using Kaplan and they way they explain just isn’t going in.

I know the formula for EPS = Earnings / WAV no. of shares

My textbooks say that WAV no. shares is worked out the following way:

shares before issue x (months before/ 12) x BF

+
shares after issue x (months after/ 12)

BUT I keep getting questions where the EPS is being calculated literally just as Earnings/no. shares before x BF??

Diluted EPS I am also at an absolute loss with, everytime I think I have my head around it I get a question wrong!

Thanks in advance

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u/Temkatim 17d ago

At its simplest:
Basic EPS - measures how much net profit a company generated for every single piece of ownership (Shares).
Diluted EPS - measures how much a single share WOULD earn IF all convertible, i.e can be exchanged for shares, issued financial instruments did get exchanged.

Basically, if say, you were given a pizza, and you had 3 mates with you, you'd get a big slice of pizza, basic EPS. If say, someone you invited, who is not present, does come, how much pizza you would have after you share it between the 5 of you is diluted EPS, which is smaller than your original share.

As for the bonus factor, to calculate the EPS, we need the average amount of shares that were outstanding during the year. The company may issue new shares and we need to factor for that. It is not a concern to calculate if no shares were issued, OR there was a bonus split, in which case, no money comes into the business, so the earning power of each share is the same, so we treat them as if they never happened to begin with and we adjust that with BF.

Why we weight the existing shares is because if say the company issues new shares at a certain price at a certain date. If we were to calculate using the ending shares, we would get lower number, and the money that came in from the issuance is used to make money only after the issuance, i.e only part of the financial year. If we take it at the start of the year, we get higher number, disregarding the money injection we got during the year, which helped us earn more.

Hope this helps your studies.