Understanding Adjusted EPS

Adjusted EPS (Earnings Per Share) is an important financial metric used by companies to show a more accurate view of their profitability.

Adjusted EPS (Earnings Per Share) is an important financial metric used by companies to show a more accurate view of their profitability. EPS is a measure that tells us how much profit a company makes for each share of its stock. But, sometimes, companies adjust their EPS to exclude certain one-time or unusual events. These adjustments help investors understand the company’s true earning potential without being confused by irregular costs or gains.

Why Adjusted EPS is Important

While standard EPS gives a general idea of how much a company earns per share, it might include one-time expenses or gains, like restructuring costs, legal fees, or gains from selling assets. These events might not happen again, and they could make the company’s earnings look higher or lower than usual.

Adjusted EPS removes these items, giving investors a clearer picture of the company’s regular performance. It helps to show what a company’s ongoing earnings are without the noise from uncommon events. This makes it easier to compare the company's performance from year to year or with other businesses in the same industry.

How Adjusted EPS is Calculated

To calculate Adjusted EPS, we start with the company’s basic EPS. Then, we remove or adjust for any one-time or non-recurring items that may have affected earnings. For example, if a company paid a large settlement in a lawsuit, the cost of that settlement might be removed from the earnings calculation.

The formula for Adjusted EPS is:

Adjusted EPS = (Net Income - Non-Recurring Items) / Number of Shares Outstanding

Example of Adjusted EPS

Imagine a company reporting a net income of Rs 10 crore for the year, but it had one-time costs of Rs 2 crore from a factory closure. Its basic EPS would include this Rs 2 crore loss, but if we adjust the EPS, we remove this amount to show the company's regular earnings.

If the company has 1 million shares outstanding, the basic EPS would be:

Basic EPS = Rs 10 crore / 1 crore = Rs 10 per share

Adjusted EPS would be:

Adjusted EPS = (Rs 10 crore – Rs 2 crore) / 1 crore = Rs 8 per share

Conclusion

Adjusted EPS is a helpful tool for investors because it gives a clearer picture of a company’s true profitability by excluding non-recurring items. It allows for better decision-making, helping investors to focus on the company's regular earning ability, which can lead to more informed investments.