What is Headline Earnings Per Share (HEPS)?
Headline Earnings Per Share (HEPS) is an earnings metric used to provide a clear view of a company’s financial performance. It is calculated under the guidance of the Chartered Financial Analyst Society and aims to reflect the core earnings of a company by including all trading profits and losses for the year. It excludes profits or losses from the sale or termination of discontinued operations, the sale of fixed assets, or any permanent impairment of asset values.
Key Components of HEPS
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Inclusions:
- Trading profits and losses for the year.
- Interest income and expenses.
- Profits and losses from acquisitions and discontinued operations during the year.
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Exclusions:
- Profits or losses from the sale or termination of discontinued operations.
- Profits or losses from the sale of fixed assets.
- Permanent impairments or write-offs.
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Special Considerations: Abnormal trading items should be included but must be prominently displayed in notes if they are significant.
Calculation Example
Suppose a company has the following financial data for the year:
- Trading profit: $1,000,000
- Interest income: $50,000
- Profit from discontinued operations: $100,000
- Loss on sale of fixed assets: $200,000
To calculate HEPS, we would include the trading profit and the interest income, but exclude the profit from discontinued operations and the loss on the sale of fixed assets.
HEPS Calculation:
\( \text{HEPS} = (\text{Trading Profit} + \text{Interest Income}) - (\text{Loss on Fixed Asset Sale}) \) \( = (1,000,000 + 50,000) - 0 \) \( = 1,050,000 \)
If the company has 1,000,000 shares outstanding, the HEPS would be:
\( \text{HEPS Per Share} = \frac{1,050,000}{1,000,000} = $1.05 \)
Frequently Asked Questions (FAQs)
1. Why is HEPS important?
HEPS provides a more accurate reflection of a company’s recurring earnings by excluding non-recurring events that can distort the real financial performance.
2. How is HEPS different from EPS?
While EPS takes into account all earnings, including one-time gains and losses, HEPS focuses on the recurring earnings by excluding non-operational, non-recurring items.
3. Who typically uses HEPS?
Analysts, investors, and financial analysts use HEPS to gauge the core profitability of a company, particularly when comparing companies across industries.
4. Is HEPS a required metric?
While not required by all standard accounting frameworks, many companies voluntarily disclose HEPS along with International Accounting Standard (IAS) 33 calculations to provide more transparency.
5. Where are abnormal trading items displayed in HEPS calculations?
Abnormal trading items are included in the HEPS figure but must be prominently displayed in the notes if they are significant.
Related Terms
- Earnings Per Share (EPS): Measures the portion of a company’s profit allocated to each outstanding share of common stock.
- International Accounting Standard (IAS) 33: Provides guidelines on reporting earnings per share.
- Price-Earnings Ratio (P/E Ratio): A ratio for valuing a company that measures its current share price relative to its per-share earnings.
- Fixed Assets: Long-term tangible assets that a company uses in its operations to generate income.
Online References
- Investopedia - Earnings Per Share (EPS)
- International Accounting Standards Board (IASB) - IAS 33
- Financial Times Lexicon - HEPS
Suggested Books for Further Studies
- “Financial Statement Analysis and Security Valuation” by Stephen Penman
- “Accounting for Corporate Combinations and Associations” by Ormrod and Ma
- “Financial Accounting: An Introduction to Concepts, Methods, and Uses” by Stickney, Weil, Schipper, and Francis
Accounting Basics: “Headline Earnings Per Share” Fundamentals Quiz
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