Weighting Your Time

Currently accounting rules take net income and divides it by the weighted average number of common shares in order to get earnings per share. This is a completely useless measurement and falsifies the truth but the error corrects itself in a year.

The idea is that if a company has 1 share and issues 1 in the middle of the year at the end of the year the weighted average amount of shares is 1.5 (1 + 1*(6/12)) So if a company earned $1 it would divided it by 1.5 in order to get its EPS for the year. But the EPS should actually be 1/2 or 50 cents instead of 67 cents.

Here is why weighted average amount of shares is useless. Lets say a family of two people in the current year. Both adults earn $100,000 a year and on the last day of the year they adopt three children. If we were to use the weighted average amount of people in their family for the current year we would get earnings per member of $100,000 since the adoption was on the last day of the year. But the number that should be used is 200,000/5 which would be 40,000 per member and it would be pretty ridiculous to think these new family members have no share in these earnings.

If we extrapolate this to shares, we know that the earnings for the current year are for all shareholders. If a company were to issue a dividend after it issued shares would it only pay that amount to the weighted number?

The weighted average number can be extremely difficult to calculate and its not worth its weight in salt. Though calculating it can be easily done it is still a waste of time and should be gotten rid of.