The Daily Technical #72: What is an 8-K and when is it required to be filed?

Good morning. Welcome to the 72nd edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
What are the two ways to calculate earnings per share (EPS)?

Basic EPS: Determines a company's earnings on a per-share basis, but allocable to only the basic shares outstanding (otherwise known as "common shares").

Basic EPS = (Net Income − Dividends on Preferred Stock) / Basic Weighted Average Shares Outstanding

Diluted EPS: Compares a company's earnings relative to its shares outstanding on a per-share basis but considers the impact of potentially dilutive securities such as options, warrants, and convertible securities. If an option is "in-the-money," the option holder can become a common shareholder at their choosing. Thus, diluted EPS is a more accurate depiction of ownership value per share.

Diluted EPS = (Net Income − Dividends on Preferred Stock) / Diluted Weighted Average Shares Outstanding

Common Mistakes

1. Mixing up the formulas for basic and diluted EPS. Always ensure to differentiate between the two, remembering that basic EPS ignores potential dilution, while diluted EPS accounts for it.

2. Forget to subtract preferred dividends from net income when calculating both basic and diluted EPS. Always factor in preferred dividends to accurately reflect earnings available to common shareholders.

3. Using the wrong number of shares (basic vs. diluted) skews results. Always verify whether you're using basic weighted average shares or diluted weighted average shares to get the right calculation.

TL;DR

• Basic EPS focuses on true earnings per existing common share, excluding dilution.

  • Basic EPS = (Net Income − Dividends on Preferred Stock) / Basic Weighted Average Shares Outstanding

• Diluted EPS offers a broader viewpoint, including potential share increases.

  • Diluted EPS = (Net Income − Dividends on Preferred Stock) / Diluted Weighted Average Shares Outstanding

TODAY’S QUESTION
What is an 8-K and when is it required to be filed?

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THAT’S A WRAP
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