Diluted Earnings Per Share (Diluted EPS)
Categories: Company Valuation, Accounting, Company Management
Consider the company headquarters for Beef in a Can, the meat industry’s answer to EZ Cheese. Ok, so the earnings number came in just fine at $1.12 a share. It's about what the Street was expecting. But then why did the stock sell off hard in the aftermarket? The stock was $35.52 at the close, and now it’s at $33.20. Not a huge break, but 6 percent is 6 percent. So what gives?
Well, the primary earnings number was good. It beat Street expectations. But the fully diluted earnings per share...well…they sucked. Why? Because the company had granted too many stock options to its employees. There’s a super competitive environment in Silicon Valley to hire engineers, so…yes…in very Wall Streety irony, the company, in trying to be generous with its employees, and be competitive, killed their stock. Where’s the beef, indeed.
Well, those stock option grants were, in fact, recognized by investors, and those “generous grants” ended up costing the employees and all the shareholders meaningful money as the stock price sagged.
Huh? How’d 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 options. So Beef in a Can has 100 million shares outstanding—of common shares—but it surprised Wall Street to learn that the company now also had 12 million options outstanding. And as the company earned $112 million, then yes, they had net income or earnings per share of a dollar twelve for their primary earnings.
But their fully diluted earnings are divided by the 100 million common plus the 12 million options, and that calculation is made by dividing the $112 million in earnings by the conveniently numbered 112 million fully diluted shares and options, to get only a dollar a share in fully diluted EPS.
Why is that such a problem? Well…dilution is a bad thing if you’re an already-owning-owner of a company. Your ownership pie gets spread out over more and more mouths to feed, and you get less fat.
So when Wall Street sold off the stock on this earnings surprise, the actual printed number was just fine. It was the denominator…the total dilution of option grants...that beat up the stock. The fully diluted earnings were amiss. And yeah...if you’re the CEO of this company, you might, uh…have a beef with that.
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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