Basic earnings per share (EPS) under IAS 33 is profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding in the period. Diluted EPS adjusts both figures as if every dilutive convertible bond, option and warrant had been turned into shares. Both are shown on the face of the statement of profit or loss.
EPS is the most quoted number in financial reporting, and the easiest to get wrong through the denominator. The profit figure is usually given to you; the share count is where the work is. This guide covers the numerator, how each kind of share issue is weighted, and diluted EPS, with four worked examples.
Basic EPS
Basic EPS = Profit attributable to ordinary equity holders of the parent ÷ Weighted average number of ordinary shares
The numerator starts from profit after tax and deducts preference dividends, because preference shareholders are not ordinary shareholders. Which preference dividends to deduct depends on the shares:
- Cumulative preference shares: deduct the dividend for the period whether or not it was declared. An unpaid cumulative dividend still belongs to those holders.
- Non-cumulative preference shares: deduct only dividends actually declared for the period.
Weighting the shares
| Share event | Time-weighted? | Comparatives restated? | Why |
|---|---|---|---|
| Issue at full market price | Yes, from the issue date | No | New money arrived partway through the year |
| Bonus issue (stock dividend, share split) | No; treated as always in issue | Yes | No new money; the same company is cut into more pieces |
| Rights issue below market price | Partly: a bonus fraction before the issue, then time-weighted | Yes, by the bonus fraction | It is part full-price issue, part bonus |
| Share buyback | Yes, removed from the date bought back | No | Money left the company partway through |
Example 1: a full-price issue during the year
A company has 1,000,000 ordinary shares on January 1, 2026. On July 1, 2026 it issues 400,000 more at full market price. Profit after tax is $2,340,000. Cumulative preference dividends of $140,000 relate to the year; none were declared.
| Amount | |
|---|---|
| Numerator: $2,340,000 − $140,000 | $2,200,000 |
| Shares: 1,000,000 × 12/12 | 1,000,000 |
| Shares: 400,000 × 6/12 | 200,000 |
| Weighted average shares | 1,200,000 |
| Basic EPS ($2,200,000 ÷ 1,200,000) | $1.83 |
The preference dividend is deducted even though it was not declared, because the shares are cumulative.
Example 2: a rights issue
A company has 2,000,000 shares. On October 1, 2026 it makes a 1-for-4 rights issue at $3.00 a share, when the market price just before the issue was $4.50.
First, the theoretical ex-rights price (TERP): four existing shares at $4.50 ($18.00) plus one new share at $3.00 gives five shares worth $21.00, so TERP = $21.00 ÷ 5 = $4.20.
Bonus fraction = price before the issue ÷ TERP = $4.50 ÷ $4.20 = 15/14.
| Period | Working | Weighted shares |
|---|---|---|
| Jan 1 to Sep 30 | 2,000,000 × 9/12 × 15/14 | 1,607,143 |
| Oct 1 to Dec 31 | 2,500,000 × 3/12 | 625,000 |
| Weighted average | 2,232,143 |
Last year's EPS is restated too, by dividing it by 15/14, so that both years are measured on the same basis.
Diluted EPS
Diluted EPS shows what EPS would be if all dilutive potential ordinary shares were issued. Those include convertible bonds, convertible preference shares, share options and warrants.
- Convertible instruments: assume conversion at the start of the year, or the issue date if later. Add the new shares to the denominator, and add back to the numerator the after-tax interest (or the preference dividend) that would no longer be paid.
- Options and warrants: assume they are exercised and the cash received is used to buy back shares at the average market price. Only the shares effectively issued for nothing go into the denominator.
An instrument is included only if it is dilutive, meaning it lowers EPS. Anti-dilutive instruments are left out. Options are dilutive only when their exercise price is below the average market price.
Example 3: convertible bonds
Continue with Example 1: profit for ordinary shareholders of $2,200,000, 1,200,000 weighted shares and basic EPS of $1.83. The company also has $2,000,000 of 6% convertible bonds, convertible into 300,000 shares. The tax rate is 25%.
| Amount | |
|---|---|
| Interest saved: $2,000,000 × 6% | $120,000 |
| After tax: $120,000 × (1 − 25%) | $90,000 |
| Adjusted profit: $2,200,000 + $90,000 | $2,290,000 |
| Adjusted shares: 1,200,000 + 300,000 | 1,500,000 |
| Diluted EPS | $1.53 |
$1.53 is below the basic $1.83, so the bonds are dilutive and are included. If the result had been above $1.83, they would be anti-dilutive and left out.
Example 4: share options
The company also has 100,000 options exercisable at $5.00. The average market price for the year was $8.00.
If exercised, the options bring in 100,000 × $5.00 = $500,000, which would buy back $500,000 ÷ $8.00 = 62,500 shares at market price. The other 100,000 − 62,500 = 37,500 shares are effectively issued for nothing, so they are added to the diluted denominator. There is no change to the numerator.
With several potential shares, IAS 33 includes them one at a time, starting with the most dilutive, so that an instrument is never counted if it would raise EPS once the others are included.
Common EPS mistakes
- Time-weighting a bonus issue. Bonus shares are treated as always in issue, and comparatives are restated.
- Not restating comparatives after a bonus or rights issue.
- Adding back pre-tax interest on convertible bonds. The add-back is after tax.
- Including anti-dilutive instruments. Test each one; anything that raises EPS is excluded.
- Deducting undeclared non-cumulative preference dividends. Only cumulative dividends are deducted whether declared or not.
- Adding all the option shares. Only the shares effectively issued for nothing count.
US GAAP (ASC 260) uses the same basic and diluted approach, with "net income available to common stockholders" as the numerator.
Practice it
EPS questions are denominator questions: almost every lost mark is a share event weighted the wrong way. Accountely's earnings per share challenges and dilution challenges mark the weighted average separately from the final figure, so a bonus fraction slip does not hide otherwise sound work. It's free to start.
Frequently Asked Questions
How is basic EPS calculated?
Divide the profit attributable to ordinary shareholders (profit after tax less preference dividends) by the weighted average number of ordinary shares outstanding during the period.
What is the difference between basic and diluted EPS?
Basic EPS uses the shares actually outstanding. Diluted EPS assumes that all dilutive convertible instruments, options and warrants have been converted into shares, which lowers EPS. It shows the worst case for existing shareholders.
Why is a bonus issue not time-weighted?
Because no new money comes into the company. The same earnings are spread over more shares, so the bonus shares are treated as if they had always been in issue, and the comparative EPS is restated for consistency.
What does anti-dilutive mean?
An instrument is anti-dilutive if including it would increase EPS or reduce a loss per share. Anti-dilutive instruments are excluded from diluted EPS.