Question

QUESTION #1 – What is a ‘simple capital structure’?

QUESTION #2 – What is a ‘complex capital structure’?

QUESTION #3 – What does ‘potential shares’ mean?

QUESTION #4 – What does EPS really mean for a company? Where do we find EPS

QUESTION #5 – What are the 2 ways to calculate EPS? What’s the difference between these two? Why do companies calculate EPS twice?

Answer 1

1. A simple capital structure refers to a corporation that does not issue dilutive securities to finance its organization. In other words, the capital structure is made up of only common stock and non-convertible preferred stock. This is referred to as simple because no outstanding securities can increase the number of outstanding shares and dilute the ownership and value of the current common shareholders.

2. A complex capital structure refers to corporation that has outstanding dilutive securitiesincluding rights or options to purchase stock and convertible preferred stock or bonds. In other words, the capital structure is made up of common stockalong with many different securities that can increase the amount of common shares outstanding.

3. A potential equity share is a financial instrument or other contract that entitles, or may entitle, its holder to equity shares.

4. Earnings per share (EPS) is the portion of a company's profit allocated to each share of common stock. Earnings per share serves as an indicator of a company's profitability.

In annual reports of the company we will find Eps

5. In a company with complex capital structure, if all the potentially convertible financial instruments are converted into common stock & then the EPS is calculated, then the resultant EPS will be diluted EPS. In contrast, a basic EPS is calculated using only the common stock of the company (not other convertible debt).

Usually, investors believe that higher the EPS, the better. This is true to an extent as the higher the EPS, the more profitable the company is and there are higher chances that company will pay out higher dividends on common stock. But it is important to understand that EPS as a measure by itself, will not give any definitive indication to the financial health of the company. To establish the strength of EPS, analysts compare the present EPS with that of historical EPS of the same company. For example, basic EPS of Apple Inc. was USD 8.35 in September 2016 & USD 9.27 in September 2017, which means company’s profitability increased. Furthermore, the analysts also compare a company’s EPS with that of its competitors to understand its standing in the market. Thus we can conclude that all other things equal, a company with higher EPS is more profitable & financially strong.