Financial Education

To compute basic earnings per share one divides the company’s net income by the weighted average number of common (U.S.) or ordinary (IAS) shares outstanding - that is, shares currently held by investors. The weighted average shares outstanding are computed by looking at the number of shares outstanding each day weighted by the number of days. For example, assume a company has 1,000 shares outstanding at the beginning of the year, January 1, and issues 500 additional shares on April 1. The weighted average number of shares outstanding is 1,377 (1,000 X 90/365 + 1,500 X 275/365). If you owned 100 shares at the beginning as well as at the end of the year, the resulting earnings per share is not necessarily your share of earnings for the past year but is an approximation based on the average number of shares outstanding. This measure also does not consider the potential impact of other securities that are convertible into common (or ordinary) shares.

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis, Ratio Analysis, Valuation

See also:

Earnings per Share (EPS)

Normalizing Price to Earnings Ratio for Business Cycle Effects

Adjusted Earnings Yield

Price Multiples

No-Growth Value Per Share