Basic EPS

Basic earnings per share uses the actual shares in issue, without considering shares that might be created in future from stock options, warrants or convertible securities.

Two adjustments are important. First, any dividends owed to preferred shareholders are subtracted from net income, because that profit does not belong to ordinary shareholders. Second, the number of shares is a weighted average, reflecting how long each share was outstanding during the period.

For example, a company with 4 million shares for the first half of the year issues 2 million more at mid-year, so it has 6 million for the second half. Its weighted average share count is 5 million. If net income attributable to ordinary shareholders is 10 million, basic EPS is 2.00.

Basic EPS gives a straightforward measure of profit per share based on shares that actually exist. Companies also report diluted EPS, which assumes that potential shares are created and therefore gives a more cautious figure. When the two numbers are far apart, it signals that significant dilution could occur in future.