Earning Per Share

Earning Per Share

Earning per share simply mean how much a share investment has earned or in other word total profit is divided by number of ordinary shares. Earning per share is important indicator because investment is made in entity for profit. Most of the investor don't have the deep accounting understanding and therefore are unable to understand the financial statement, therefore , EPS give them an idea about the entity performance and help them to make informed decision.

Types of Earning Per Share

There are mainly two types of earning per share.

1. Basic Earning per Share
2. Diluted Earning Per Share

Accounting Treatment of Earning per Share

it is important to remember that earning per share is a disclosure requirement and not an accounting transaction like revenue, therefore, EPS is not recorded in books of account rather it is calculated and disclosed in financial statements. 

Basic Earning per share is calculated simply dividing the profit by number of ordinary shares. when there is additional issue of shares during the year then it is divided by average number of shares outstanding during the year. 

In case there is bonus issue during the year , then bonus issue is treated to have been issued at the start of year because bonus shares bring no additional resources to the organization.


In case there is right issue during the year , then it involves more complex calculation . first of all theoretical ex Right price is calculated then this price is used to calculate an adjustment factor and then this adjustment factor is multiplied with number of shares outstanding before such issue.

Diluted earning per share

Diluted earning per share is calculated on the bases that how the earning per share is effect if the shares has option to be issued are issued.

Types of Diluted Earning per Share

There are basically two types of Diluted Earning per share

1. Convertible debts are converted into shares
2. Share under options are issued.

Limitation of Earning per share

The earning per share is calculated from the historical information and does not take into account future prospect of entity, moreover, the earning per share is not a sole performance indicator and should not be look in isolation.