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Basic Earnings per Share Formula

Overview of Basic Earnings per Share

Basic earnings per share is the amount of earnings for a reporting period that are available to each share of common stock outstanding during that reporting period. An entity whose capital structure only includes common stock should present only its basic earnings per share for income from continuing operations and for net income. This information should appear on the face of the income statement.

You calculate basic earnings per share as follows:

Profit or loss attributable to common equity holders of the parent entity
Weighted average number of common shares outstanding during the period

This calculation is further split into the profit or loss from continuing operations attributable to the parent entity, and total profit or loss attributable to the parent entity. You should adjust both of these items for the effects of preferred stock.

Also incorporate the following adjustment into the numerator of the calculation of basic earnings per share:

• Dividends. For the calculation of basic earnings per share, deduct from the profit or loss in the numerator the after-tax amount of any dividends declared on non-cumulative preferred stock as well as the after-tax amount of any dividends for preferred stock, even if the dividends have not been declared; this does not include the amount of such dividends paid or declared during the current period that relates to previous periods.

Also incorporate the following adjustments into the denominator of the calculation of basic earnings per share:

• Contingent stock. If stock is contingently issuable, treat it as outstanding as of the date when there is no circumstance under which those shares would not be issued.
• Issuance date. Include shares in the denominator as of the date when cash is receivable for sold shares, when dividends are reinvested, when interest ceases to accrue on convertible debt instruments for which shares are issued, when a liability is settled in exchange for shares, when an acquisition is recognized in exchange for shares, and as services are rendered in exchange for shares. If there is a mandatorily convertible instrument, then include the related shares in the denominator as of the contract date.
• Weighted average shares. The calculation of the weighted average number of shares outstanding during the period is to adjust the number of shares outstanding at the beginning of the period for the number of common shares repurchased or issued during the reporting period, adjusted by the number of days that the shares are outstanding as a proportion of the total days in the period.

Example of Basic Earnings per Share

Ram-Jet International earns a profit of $10 million after tax in Year 1. In addition, Ram-Jet owes $250,000 in dividends to the holders of its cumulative preferred stock. Ram-Jet calculates the numerator of its basic earnings per share as:

$10,000,000 profit - $250,000 dividends  = $9,750,000

Ram-Jet had 8 million common shares outstanding at the beginning of Year 1. In addition, it sold 500,000 shares on April 1 and 800,000 shares on October 1. It also issued 1,000,000 shares on July 1 as part of a share true-up transaction to the shareholders of a former acquisition. Finally, it bought back 100,000 shares on December 1. Ram-Jet calculates the weighted average number of shares outstanding as follows:

Ram-Jet’s basic earnings per share is $9,750,000 adjusted profits ÷ 9,083,333 weighted average shares, or $1.07 per share.

Related Topics

Diluted earnings per share
Income statement overview