In today's world one can easily say that a company's earnings are its profit. In order to compare the earnings of different companies the analysts quite often use the ratio Earnings per share (EPS). In order to calculate the earnings per share we generally take the earnings left over for the shareholders and divide it by the number of outstanding shares. If in case the number of shares in [1] the markets have changed a weighted average of the quantity of shares is taken. The earnings per share is a key ratio which is used in share valuations. Basically it shows that how much of the company's profit after tax does each shareholder owns for example if a company is making a post tax profit of 1.2 million and there are 20 million shares then the earnings per shares will be 60 pence. Earnings per share obviously has lot of importance for any ongoing business as the viability of the business depends on the income which it generates, if a business is not generating profit slowly and gradually it will become bankrupt and eventually shutdown. The earnings per share allow us to compare profit making capability of every company. The higher is the earnings per share the higher is the price of each share and vice versa.
Positive earnings
Investors expect big companies like Marks and Spencer to have positive earnings, if in case marks and Spencer shows lower earnings for a quarter then in that case there is a possibility that the stock may drop unless and until there is a reason to explain it as a onetime event. Newly formed companies may have negative earnings for several years but they still enjoy the favour of the market if the investors have faith that these companies can do much better in the coming future. A company can report positive earnings for a certain quarter but gradually fall short of expectations and the stock may fall down eventually. Positive earnings tell us that how healthy a company is and does it pays dividends.
SHAREHOLDERS WEALTH
Shareholders wealth can be defined by the market value of the shareholder's common stock holdings, by total shareholders wealth we mean that number of outstanding shares multiplied by the market price per share. Thus we can say that the market value of shareholders common stock holdings measure the shareholders wealth. We generally use the following formula for determining the shareholders wealth: Shareholder wealth= numbers of shares outstanding* market price per share. The market value of shares reflect the amount, time, and the risk of future cash flows for the firm for this very reason the management should always try to maximize the wealth of the shareholder. The shareholder wealth maximization is impersonal and provide a very clear guide for decision making and risk consideration. For example we can say that greater cash flows result in higher stock prices whereas on the other hand high risk cash flows result in low stock prices. Therefore long term goals of the firm are the main priority rather than the short term goals of an individual. The managers who have a primary goal of shareholders wealth maximization have accurate information available to make appropriate decisions for the benefit of the company in the long run. The goal of shareholder wealth maximization is a kind of a long term goal which is achieved by a number of short term decisions for maintaining shareholders wealth. Maximum shareholders wealth cannot be termed as a short term goal as increase in the current stock prices followed by the sudden decrease are very risky for shareholders as it will result in lower market value.
EXECUTIVE SUMMARY
There is a great significance of earnings per share as the viability of any ongoing business depends upon its earnings and the amount of income that it can generate. It measures the profitability of a company on a per unit basis. Earnings per share belonging to one share of stock, earnings per share are also very useful in forming an opinion about the value of equity investments. Various analysts and investors use the earnings per share ratio to compare the earnings of different companies. Earnings per share are the important thing released during the earnings season as it attracts large media coverage and attention. By the time the earnings reports come out the stock analysts issue earnings estimates which tell us that what the stock analysts think that earnings will come, all these forecasts are then brought together by the research firms and from these "consensus earnings estimate" is prepared . There are more than one type of earnings per share available on the company's income statement. The first one is the primary earnings per share, the primary earnings per share includes the effects of convertible securities but it does not include the effects of share issuances from the options and warrants whereas if we now talk about fully diluted earnings per share we will come to know that fully diluted EPS includes the effects of share issuances from options and warrants which in turn results in new capital inflows into the company .
The one of the major part of earnings per share are the earnings which are owned by the shareholder. The earnings that are a attributable to the share holders are actually the profits that are left over after the company has paid its employees, shareholders and the others who provide service to the company. Basically we can say that this is revenue minus all the expenses and preferred dividends for a quarter. The second main component of earnings per share are the number of shares which are issued by the company and which are still circulating in the market , the average outstanding shares are used in the denominator pat while calculating EPS so as to measure a shareholder's claim to income on a per unit basis. [2]
What is the importance of earnings to the investors?
One of the most important reasons for investors caring about earnings is that the earnings make stock prices. Stock earnings generally result in the stock prices moving up and vice versa. A company with a very high stock price may not be making much money but the rising price indicates that the investors are hoping that the company will be very profitable in the near future but there is no guarantee that the company will bear profits in the near future. Another example of the company's earnings coming significantly short of the numbers can be the dotcom boom. When the dotcom boom started everyone was excited and the stock prices went up but eventually with the passage of time it became clear that the dotcoms are not going to be as much profitable as they were expected to be meaning that they could not make as much money as it was expected from them. A company has two options when it is making money.
Shareholders Wealth Maximisation
Nowadays one of the most important aims of any firm or organisation is the maximization of shareholder's wealth. From a long time this has bee [3] n achieved by increasing the overall sales of the company, making profit and thereby an increase in cash dividends to the investors as a reward. Most of the companies and corporate houses strive hard to increase the shareholders dividend as it is a clear indication of the fact that company is flourishing and making continuous profits. Generally profit maximization is regarded as one of the primary goals of the company but it is not as comprehensive objective as that of shareholders wealth maximization. Even the maximization of earnings per share cannot be said to be the appropriate goal, the reason for this is that it does not have any specific time of expected return. Another short coming of maximizing earnings per share can be that it does not take into account the uncertainty involved with the future earnings. Another very important goal of the company managers is to maximize the shareholder value. It is a well known fact that stakeholder's values are enhanced by only those companies who manage values. The reason for this is that profit making companies who maximize shareholders value are able to enjoy much higher productivity and thus they are able to raise more favourable financing. Most of these companies recruit more workers and hence increase employment, providing good salary and remuneration to their workers thus eliminating dissatisfaction amongst them. The overall result of all this will be that the customers will be getting high and good quality products from the company as compared to it's competitors at a very reasonable cost due to all this the debt holders agree to lend even more amount of capital as a result all these things strengthen stakeholders positions.
A company's value is equal to its possible future cash flow stream discounted by markets required rate of return. Increased shareholders value should always emphasize on maximizing long term cash flows. Managers should always try to concentrate on those areas which the purchasers may take into account while making acquisition decisions. By shareholder value we mean to say that the total benefits which the shareholders receive from investing in a particular company. Generally the shareholders value depends on cash flows from operations, discount rate and the loan capital. Generally shareholder value can be defined as corporate value minus the debts, by corporate value we mean that the present value of cash flows from operations during the forecast period plus residual values and marketable securities. Implementing the shareholders value will differ quite significantly between different companies on the basis of the size of the company, the status of the company at a global level and the style of management which the company follows. The implementation of shareholders value must always be done in three phases Firstly the top management of the company should be fully convinced that that there is an immediate need for change in the company. The details of change which is about to be brought should be should be defined and introduced at all levels of management and thirdly the change brought should be resistant so as to make sure that it is persistent. Companies operate as a part of the societies and they do have some social responsibilities towards their employees, customers and nowadays even the government, it may be possible that these moral responsibilities may be in a way harmful or in a way wealth destroying for the shareholders. A company which is not incurring profit due to the simple reason that it is incurring more attention on its employees rather than shareholders will increase the probability of destroying wealth by not using it's resources as effectively as they should be used and thereby reducing the investments in the economy which will be quite harmful to the stakeholders. But when it is all said and done there is only one thing which is important in this respect and that is shareholders value as shareholders are the people who take risk an invest in the business not knowing the fact whether the business will incur profits or losses in the coming future so if the company will not take the responsibility to reward the shareholders then even the existing investors will back out for better investments and the company will eventually bear losses and go down.samuel.brugger.googlepages.com/11._Shareholder.pdf.
Does Shareholders wealth maximization lack unanimous consent?
Because of the coexisting financial interests of all shareholders are not comfortable with the share price increase and neither are they in a poor condition when the share prices go down. The main reason for this can be the time dimension of the shareholder value. It is still unclear that it refers to the present or to the future. If the managers are aware of the fact that stock's intrinsic value is higher than the market value then there will arise a doubt that whether they should hold back or sell their shares. If they decide to sell the shares rather than holding them back then they should make sure that the stock price is high and if the shareholders want to hold back the shares then in that case costly activities do not make any sense secondly there is a lack of agreement between the shareholders because of conflicting interest for example the conflicts of large and small shareholders when the large shareholders can exercise their voting power to extract the private benefits of control, imposing tax references, asking the firm to pursue the policies suiting their personal risk exposure, discouraging those financial decisions that could weaken control. Thus even if the share price falls the large shareholders can still derive benefits from the managerial decisions.
CONCLUSION
From the evidence collected and discussed above I have finally come to the conclusion that in the past ten years there has been a greater emphasis on investor related goals like shareholder wealth and earnings per share because for every company or running business it's earnings are very important . Earnings determine the profitability of a business concern, the viability of any business concern depends upon the income that it can generate. For the long term survival of the company it has to make some amount of money otherwise it will eventually become bankrupt. The earnings per share helps us to compare the profit making abilities of the company so therefore a company's earnings can be said to be its profits as discussed above it is the indicator of company's financial health. Another reason for this can be globalisation of the economy. Earlier big corporations and companies use to set up their business in the developed countries but now the developing countries and some of the underdeveloped countries are also improving their economies and a lot of big companies are setting up their businesses in developing countries as well so the investors are investing in such upcoming companies and they are taking risks as they are not sure that whether the companies will incur profits or not in the coming future this is the reason why companies nowadays focus on maximizing shareholders wealth rather than maximizing the wealth of the company because if shareholders will not be rewarded and they will not be satisfied and in the future no one will be interested in investing his money in the company. Increased shareholders dividend is a clear indication of the fact that that the company is doing well and making money thus the managers strive hard to ensure that the shareholders wealth is maximised.
