Chapter 20: Earnings per Share
- Page ID
- 97968
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)Facebook and Twitter: Same Industry, But Two Different Stories
Facebook and Twitter reported very different earnings performance in Q2 of 2015. Facebook stocks increased by nearly 30% in the previous year while Twitter struggled. Twitter's stock had lost more than 7% from 2014 and more than 33% from its high in April 2015. Since both are social media companies, why such a difference?
Twitter was in transition while it searched for a new CEO, resulting in a company operating without a leader or a strategic plan. Moreover, plans to make the software app more user-friendly had been delayed. Some increases in earnings per share were anticipated by the market, but this was overshadowed by the key performance metric of growth for this industry, the Average Monthly Active Users (MAUs), which fell short of analysts' expectations.
Facebook on the other hand had 4.7 times Twitter's user base and had been increasing its earnings per share by giant leaps, making this company the eighth largest company in America by the market. Growth is expected to continue, even if at a slower rate typical of companies that reach giant-size proportions. Moreover, Bank of America has added Facebook to its list of top investment ideas due to the firm's improved advertising targeting through Instagram, its video campaigns, and its growth of new software platforms such as Messenger. Facebook has also leveraged its investments in ramping up sharing instant news articles and following public figures campaigns (areas that were once dominated by Twitter). Both developments have resulted in increased followers and have been very successful.
Time will tell if Twitter can make up for its lost market position.
(Source: Boorstin, 2015)
After completing this chapter, you should be able to:
- Describe earnings per share (EPS) and their role in accounting and business.
- Describe basic and diluted earnings per share in terms of an overview.
- Calculate basic earnings per share.
- Calculate diluted earnings per share and report the final results.
- Describe the issues that can affect both basic and diluted earnings per share.
- Calculate basic and diluted earnings per share in terms of a comprehensive illustration.
- Identify and explain how earnings per share and price-earnings ratio are used to analyze company performance from an investor perspective.
- Explain the difference between ASPE and IFRS regarding earnings per share.
Introduction
This chapter will focus on the basics of calculating, reporting, and interpreting earnings per share (EPS) as an important shareholder and potential investor evaluation metric. The chapter will discuss two primary types of EPS, namely basic and diluted earnings per share.