Anomalies In Calculating Earnings Per Share

Certain anomalies exist that may result from the present computation of earnings per share. It can be shown that the course of action that is to the immediate benefit of the stockholders can lead to a lower earnings per share figure and can do so without regard for future earnings per share figures. Some problems can arise from using the weighted average number of shares outstanding as the denominator. A proposed calculation would establish earnings per share for any period to be the simple sum of the earnings per share figures for the subintervals. When this simple calculation is used, a management decision anomaly, an investment anomaly, a business combination anomaly, and a dividends per share anomaly do not occur. It is suggested that, when there has been a change in the number of shares outstanding during a period, care should be exercised in drawing inferences about market value from reported earnings per share.