Why basic earnings per share (EPS) matters to a first-time founder
Basic earnings per share, or basic EPS, helps investors compare the earnings attributable to each ordinary share across reporting periods and companies. It can affect valuation and investor communication. Founders of companies with external shareholders should understand the inputs, because share issues and buybacks change the weighted-average share count used in the calculation.
Examples of basic earnings per share (EPS)
A listed Australian company reports AUD 6 million of profit attributable to ordinary shareholders and a weighted average of 3 million ordinary shares during the year. Its basic EPS is AUD 2.00. It uses a weighted average because it issued 1 million of those shares halfway through the reporting period.
Common misunderstanding
Basic EPS is not simply total profit divided by shares outstanding at year end. The numerator is profit attributable to ordinary shareholders, and the denominator is weighted-average ordinary shares during the period. Preferred dividends and whether continuing operations are presented separately depend on the applicable reporting framework. Diluted EPS also considers potentially dilutive instruments.
When to use it
Use basic EPS when preparing or reading financial reports under a framework that requires or permits it, and when comparing per-share performance on a consistent basis. Check the accounting standard, share changes, stock splits and rights issues carefully. Do not present a homemade calculation as compliant EPS without professional review.