Accounting for Financial Modeling

Net Income
 Net Income Margin

net income margin: net income / revenue

net income margin is a measure of the overall success of a business

high net profit margin indicates that a business is pricing its products correctly and is exercising good cost
control

net income margin is useful for comparing the results of companies within the same industry

companies within the same industry are subject to the same business environment, customer base, and cost
structures
 EPS

Basic Shares Outstanding - total number of shares that a corporation has issued to investors (less the
shares that company has repurchased “treasure stock”)

Diluted Shares Outstanding - basic shares outstanding plus the effect of dilutive, in the money securities
such as stock options, warrants and convertible debt

Earnings Per Share (EPS): Net Income / Basic Shares Outstanding

Diluted Earnings Per Share (EPS) - Net Income / Diluted Shares Outstanding
 Weighted Average Shares Outstanding
A company has total of 1,000 shares outstanding at the beginning of a year, and issued 1,000 additional
shares in November and 1,000 in December (total 3,000 at year end).
What is its weighted average shares outstanding?

January 1,000
February 1,000
March 1,000 Total Shares
Number of Weighted
Outstanding
April 1,000 Months Average
over 12 months
May 1,000
June 1,000
July 1,000 15,000 12 1,250
August 1,000
September 1,000
October 1,000
November 2,000
December 3,000
 Why EPS is important?

Price/Earnings
EPS Growth Dividends
Ratio

EPS Growth EPS services as a

Price Per Share / proxy for dividends
Actual EPS vs Earnings Per Share per share after
Analyst Estimate dilution