Diluted Normalized Earnings Per Share
Categories: Company Valuation, Accounting, Company Management
You’re in the ebola abatement business. Each year, the government spends a few bucks on you just to keep you alive as a business, in case, well, you know, a few hundred million people’s faces start melting off.
So your earnings are usually flat. But then, one year, after Miss Malaria’s high school biology class takes a field trip to study monkeys, bats, and beetles in caves in Central Ghana…well, business picks up.
So this year, with the gov having to spend a fortune on ebola abatement, you earn $9.42, and since world awareness has suddenly shot up the most popular Yahoo search term index, next year you still earn $5.17. But then things quiet down, and life goes back to normal, where your earnings are; you could plot some kind of line through them, and if someone asked you what normal earnings are in your little ebola abatement company. you could say that your normalized earnings are about $1.20.
Fortunately, making out with a Nigerian fruit bat is not normal, so...you probably don’t have to worry about contracting ebola.
Anyway, you have diluted normalized earnings—how are they diluted? The company could have a sudden bump in earnings from something like the gov spending a ton this week. It could also have earnings diluted from a need to spend more on marketing or key employees, or settling a sexual harassment suit brought by caged monkeys, etc. Yeah, you don't want one of these. It's hard enough to just make your earnings number without all the hassle from dilutive forces always at work against you.
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Finance: What is Fully Diluted EPS?1 Views
Finance allah shmoop What is fully diluted e p s
or earnings per share All right This is the company
headquarters for beef in a can the meat industry's answer
too easy cheese Okay so the earnings number came in
just fine at a dollar Twelve a share It's about
what wall street was expecting But then why did the
stock sell off so hard in the aftermarket the stock
was thirty five Fifty two with the close And now
it's only thirty three Twenty Not a huge break but
well about six ish percent is six ish percent So
what gives Well the primary earnings number was good It
beat street expectations of a buck ten But the fully
diluted earnings per share Well it sucked Why Well because
the company had granted too many stock options to its
employees There's a super competitive environment in silicon valley Teo
higher beef engineers So yes in very wall street E
Irony The company in trying to be generous with its
employees and be competitive Well it killed their stock Where's
the beef indeed Well those stock option grants were in
fact recognized by investors and those quote generous grants unquote
Ended up costing the employees well two bucks a share
and all the shareholders lost meaningful money is the stock
price sagged We'll have that work What happened Well there
are primary shares that comprise the base of a company's
ownership They are the common shares of the company and
actually owned that is they aren't just options So beef
in a can has one hundred million shares outstanding of
common shares common stock But it surprised wall street tto
learn that the company now also had twelve million options
outstanding and is the company earned one hundred twelve million
dollars then yes it had net income or earnings per
share of a dollar twelve on their primary earning things
but they're fully diluted Earnings are divided by the hundred
million common plus the twelve million options And that calculation
is made by dividing one hundred twelve million in earnings
then divided by the conveniently numbered here for this problem
one hundred twelve million fully diluted shares and options to
get only a dollar a share info fully diluted e
p s Well why is that such a problem Well
dilution is a bad thing if you're an already owning
owner of a company Your ownership i gets spread out
over more and more mouths That's gotta feed and well
you get less fat So when wall street sold off
the stock in this earning surprise the actual printed number
was just fine It was the denominator the total dilution
of option grants Well that's what feed up the stock
and yeah if you're the ceo of this company you 00:02:51.11 --> [endTime] might have a beef with that