Corporations sell shares of stock to investors. Investors expect earn a profit when they sell these shares. Investors consider a firm’s earnings per share, or EPS, when they analyze the profitability of the firm. Earnings per share communicate the profitability of the company when considering the portion attributable to each share of stock. The earnings per share consider the total number of outstanding shares, which change when companies perform stock splits or reverse stock splits. A stock split increases the number of shares outstanding by the split multiple. A reverse stock split decreases the number of shares outstanding by the split multiple.
Locate outstanding shares of common stock. Review the stockholders' equity section of the company’s balance sheet. Find the account listing for common stock. A description of the number of outstanding shares generally appears following the account title.
Review board of directors meeting notes to determine what the multiple of the reverse stock split will be. The board of directors discusses the reasons for doing a reverse stock split and makes the decision to institute the reverse split. The details of this decision appear in the notes to the board of directors meeting. Request a copy of these notes and read through them. Determine the multiple of the reverse stock split from the notes.
Recalculate the outstanding shares of common stock after the reverse stock split. Divide the number of outstanding shares by the multiple of the reverse stock split. This determines the revised number of outstanding shares.
Locate the net income for the period. Review the company’s income statement. The net income appears near the bottom of the statement.
Calculate the earnings per share. Divide the net income by the revised number of outstanding shares. This calculates the earnings per share considering the impact of the reverse stock split.
A reverse stock split also increases the market value of the stock. This occurs for a couple of reasons. A reverse stock split reduces the number of outstanding shares available for sale. As the supply decreases, the price increases. Also, the earnings per share increase because the income is divided among fewer outstanding shares. As earnings per share increases, the market price per share increases.