Page 84 - Finance for Non-Financial Managers

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The Income Statement: The Flow of Progress
that stock, and they may
be just waiting for the right
relationship between a
time. In the interim, they Price/earnings ratio The 65
stock’s price and its earn-
represent the possibility ings per share, calculated by dividing
that there will be more the price per share by earnings per
people dividing up that net share for a 12-month period. For
example, a stock selling for $50 a
income than there are now.
share and earning $5 a share has a
That is called dilution.
P/E ratio of 10.The ratio—the most
As the “For Example”
common measure of how expensive a
sidebar shows, dilution can stock is—gives investors a rough idea
significantly affect earnings of how much they’re paying for earn-
per share. So, the account- ing power.Also known as earnings
,
ing rules say you must be multiple,P/E multipleor multiple.
able to easily see the
effects on EPS if all those option holders exercised their options.
Fully diluted earnings per share is almost always shown under
the regular (primary) EPS on a public company’s income state-
ment. That way you can see what your smaller share of earn-
ings would be, worst case, and make your investment decisions
accordingly.

Using This Report Effectively
The income statement is a very useful tool for understanding a
company’s performance in a very high-level way. Internal
income statements used by company managers are typically
more useful than those generated for outsiders, because they
contain details that are not in the highly summarized versions
that are published. The best way to use an income statement is
to put it alongside income statements for prior periods or
against the expectations of the company (“the budget”) or
against income statements of other companies similar in nature.
It’s by comparison against some benchmark that the income
statement has its greatest value. It’s by comparison that you
can assign a grade for performance that’s not possible when
looking at just a statement for a single period.