Earnings per share (EPS): calculation, dilution and common distortions

The basic calculation

Basic EPS equals profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue. Profit here is after tax, after interest, and after any preference dividends.

Weighted average, not closing count

If shares were issued mid-year, using the closing count understates EPS because the new capital was only available for part of the period. Weight each tranche by the months it was in issue.

Basic versus diluted

Diluted EPS assumes every instrument that could become an ordinary share does: options, convertible loans, warrants. It is the conservative figure, and the one a sceptical investor anchors on. A wide gap between basic and diluted EPS signals significant future ownership transfer.

What distorts EPS

• Share buybacks raise EPS without improving the business.
• One-off gains, such as an asset disposal, inflate a single year.
• A change in share count from a bonus issue requires restating prior periods for comparability.
• Losses make EPS negative, and a negative EPS makes a P/E ratio meaningless.

EPS growth is not profit growth

Always check whether EPS moved because profit changed or because the share count changed. Both are legitimate, but only one reflects trading performance.

Where the inputs come from

Profit comes from the ledger. The share count does not — it lives in the share register, not in bookkeeping. NanoFora asks you to record shares outstanding on the Share data screen, then calculates EPS from the posted net profit and shows both inputs. Without a share count the metric is reported as not calculable rather than estimated. See the price/earnings ratio next.