Lesson 6 of 9 · All lessons in this module
- Revenue recognition: core principle and the five-step model
- Revenue recognition in practice and what it means for analysisVideo lesson
- Expense recognition and capitalising versus expensing
- Capitalised interest and capitalised development costsVideo lesson
- Non-recurring items, discontinued operations and accounting changesVideo lesson
- Basic EPS and the weighted average number of sharesVideo lesson
- Diluted EPS: if-converted, treasury stock and antidilutionVideo lesson
- Common-size income statements and margin analysis
- Integrated cases: capitalising, restated results and gross versus net revenue
Lesson 6 of 9 · 11 min
Basic EPS and the weighted average number of shares
Basic EPS divides the earnings that belong to ordinary shareholders by the time-weighted number of ordinary shares outstanding during the period.
In short
- EPS must be shown on the face of the income statement, for net income and for continuing operations, both basic and diluted.
- Simple capital structure: no securities that could become ordinary shares, so basic EPS = diluted EPS. Complex: convertible bonds, convertible preferred, options or warrants exist.
- Basic EPS = (net income − preferred dividends) ÷ weighted average ordinary shares. Common dividends are not deducted.
- Shares issued or repurchased are weighted by the fraction of the year they were outstanding.
- Stock splits and stock dividends are applied retroactively to the start of the period (and to all periods shown).
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