Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Earnings per Share (IAS 33) and Investor Measures for SBR

Updated 11 October 2026 · Fact-checked

Basic EPS is profit attributable to ordinary shareholders of the parent divided by the weighted average number of ordinary shares. Diluted EPS adds the effect of potential shares, such as convertibles and options. Bonus and rights issues change the share count, so you restate prior EPS. Then you interpret the result, including its limits.

Understand Earnings per Share (IAS 33) and Investor Measures

Earnings per share (EPS) tells an ordinary shareholder how much profit the company earned for each ordinary share. IAS 33 sets one method so that listed companies report it consistently. It applies to entities whose ordinary shares are publicly traded, or that are in the process of issuing them. Where there are consolidated statements, EPS is based on the consolidated figures for the parent's ordinary shareholders.

Basic EPS has two parts. The numerator is profit or loss attributable to ordinary equity holders of the parent. That means after non-controlling interest and after preference dividends (for non-cumulative preference shares, those declared; for cumulative ones, those for the period whether or not declared). The denominator is the weighted average number of ordinary shares in issue. Weight each change in shares by the time they were in issue. New shares issued for cash count from the date the cash is receivable.

Some share issues do not bring in full fair value. A bonus issue (or share split) gives shares for no cash. It creates no new resources, so IAS 33 treats it as if it happened at the start of the earliest period shown, and all comparatives are restated. A rights issue is partly a bonus issue, because shares are offered below market price. The discount is the bonus element. You adjust for it using the theoretical ex-rights price (TERP). You also restate the prior-year EPS.

Diluted EPS reflects the maximum dilution from potential ordinary shares that are dilutive. Potential ordinary shares come from convertible debt, convertible preference shares, options, warrants and contingently issuable shares. You adjust the numerator for the post-tax interest or dividends that would no longer be paid. You add the extra shares to the denominator. Potential shares are included only if they dilute, meaning they reduce EPS from continuing operations. Anti-dilutive items are ignored.

EPS feeds the investor measures. The price/earnings (P/E) ratio compares share price with EPS. Earnings yield, dividend yield and dividend cover extend the picture. In SBR you are expected to calculate these and to criticise them. EPS depends on accounting policies and estimates, ignores cash flow and risk, and can be lifted by buying back shares. It is also open to earnings management, so link it to ethics when the scenario hints at pressure on results.

Key rules to remember

Basic EPS: Basic EPS = (Profit attributable to parent's ordinary shareholders − preference dividends) ÷ weighted average number of ordinary shares; Use profit after tax and after non-controlling interest. Show the result in the currency unit per share, usually cents.
Weighted average shares: Σ (shares in issue × months outstanding ÷ 12); Time-weight each period. Apply bonus and rights adjustment factors to shares in issue before the event.
Bonus issue adjustment: Shares after bonus adjustment = old shares × (shares after the bonus issue ÷ shares before the bonus issue); For example, a 1 for 4 bonus issue has a factor of 5/4. Restate the whole period as though the shares always existed. Do not time-weight the bonus shares from the issue date.
Theoretical ex-rights price (TERP): TERP = (cum-rights price × old shares + issue price × new shares) ÷ total shares after the issue; Cum-rights price is the market price just before the shares go ex-rights.
Rights issue adjustment factor: Factor = cum-rights price ÷ TERP; Multiply shares in issue before the rights issue by this factor. Prior-year EPS is multiplied by TERP ÷ cum-rights price.
Shares issued for no consideration (options and warrants): Free shares = options × (1 − exercise price ÷ average market price); Only options with an exercise price below the average market price add shares. The numerator does not change.
Diluted EPS for convertibles: Diluted EPS = (earnings + post-tax interest or dividends saved) ÷ (basic shares + shares on conversion); Interest saved is multiplied by (1 − tax rate). Include only if the result lowers EPS.
Incremental EPS (ranking test): Incremental EPS = extra earnings ÷ extra shares; Rank potential shares from lowest to highest incremental EPS and add them in that order. Stop when EPS stops falling.
P/E ratio: P/E = market price per share ÷ EPS; Earnings yield is the inverse: EPS ÷ market price.
Dividend yield and dividend cover: Dividend yield = dividend per share ÷ market price; dividend cover = EPS ÷ dividend per share; Cover shows how many times the dividend is covered by earnings.

How to solve Earnings per Share (IAS 33) and Investor Measures questions

Use this order for any EPS question, from a simple basic EPS to a rights issue with convertibles.

1Identify the earnings figure: profit after tax, less non-controlling interest, less preference dividends that belong to the period.
2List every share movement with its date and type: full-price issue, bonus issue, rights issue, buyback or conversion.
3Treat each movement correctly. Full-price issues are time-weighted from the cash date. Bonus issues are applied from the start of the earliest period. Rights issues need TERP and the adjustment factor.
4Compute the weighted average shares and then basic EPS. Restate the comparative EPS if there was a bonus element.
5List the potential ordinary shares. For each, compute extra earnings (post-tax interest or dividends saved) and extra shares.
6Calculate incremental EPS for each item, rank from lowest to highest, and add them one at a time. Keep an item only if diluted EPS falls.
7Present basic and diluted EPS clearly, with workings. State any assumption you made, such as the average market price used.
8If the requirement asks for comment, interpret the result. Say what moved EPS, how reliable it is, and what other information an investor needs.

Quickest way: Timeline and ranking shortcut

When to use it: Use when the question has several share events and potential shares, and you have little time.

Draw a short timeline of the year with share numbers at each date.
Mark each event B (bonus), R (rights) or F (full price). Write the factor beside R events: cum-rights price ÷ TERP.
Multiply the opening shares by the factor for the period before the rights issue. Then add the new total for the remaining months.
For potential shares, write two numbers only: extra earnings and extra shares. Divide to rank them.
Add the lowest incremental EPS first and recompute. Stop as soon as EPS rises.
Write the final EPS figures, then use any spare time for two or three lines of comment.

Common mistakes in Earnings per Share (IAS 33) and Investor Measures

Time-weighting bonus shares from the date of issue
Students treat a bonus issue like a cash issue.
Fix: Apply a bonus issue to all shares as if it happened at the start of the earliest period presented. No weighting by date is needed, and prior-year EPS is restated.
Using the issue price instead of the cum-rights price in the adjustment factor
Both prices appear in the question and the formula is half-remembered.
Fix: Calculate TERP first from both prices. Then the factor is cum-rights price ÷ TERP. Check that the factor is above 1 when the issue is below market price.
Forgetting to restate the comparative EPS after a rights or bonus issue
Students focus on the current year only.
Fix: Multiply the previously reported EPS by TERP ÷ cum-rights price for a rights issue. For a bonus issue, multiply by old shares ÷ total shares after the bonus issue, for example 4/5 for a 1 for 4 bonus issue.
Adding the interest on a convertible without deducting tax
The interest saved is taken straight from the question.
Fix: The numerator adjustment is post-tax: interest × (1 − tax rate). Add the extra shares from conversion to the denominator.
Including anti-dilutive items in diluted EPS
Students add every potential share without testing.
Fix: Rank by incremental EPS and test each step. If diluted EPS would rise, leave that item out. Diluted EPS can never be higher than basic EPS.
Writing only a description of limitations without applying it to the scenario
Students recall a generic list of EPS weaknesses.
Fix: Tie each criticism to the case facts, such as a buyback, a change in policy, an unusual gain, or a bonus linked to EPS. Then say what the investor should look at instead.

Worked examples

Example 1

Delta Co had 5,000,000 ordinary shares in issue on 1 January 20X5. On 1 October 20X5 it made a 1 for 5 rights issue at $2.00 per share. The market price just before the issue was $2.50. Profit attributable to ordinary shareholders was $1,800,000 for 20X5 and $1,500,000 for 20X4. Calculate basic EPS for 20X5 and the restated EPS for 20X4.

Show the solution

New shares = 5,000,000 ÷ 5 = 1,000,000, issued at $2.00, which raises $2,000,000. Total shares after the issue = 6,000,000.
TERP = (5 × $2.50 + 1 × $2.00) ÷ 6 = $14.50 ÷ 6 = $2.4167.
Adjustment factor = $2.50 ÷ $2.4167 = 30 ÷ 29 = 1.0345.
Weighted average shares: before the issue, 5,000,000 × 30/29 × 9/12 = 3,879,310. After the issue, 6,000,000 × 3/12 = 1,500,000. Total = 5,379,310.
Basic EPS 20X5 = $1,800,000 ÷ 5,379,310 = $0.3346, which is 33.5 cents.
Restated 20X4 EPS: the originally reported EPS was $1,500,000 ÷ 5,000,000 = 30 cents. Multiply by TERP ÷ cum-rights price = 29/30. Restated EPS = 29.0 cents.

Answer: Basic EPS for 20X5 is 33.5 cents. The 20X4 comparative is restated from 30.0 cents to 29.0 cents because of the bonus element in the rights issue.

Example 2

Echo Co has profit attributable to ordinary shareholders of $2,400,000 and 8,000,000 ordinary shares in issue throughout the year. It also has (a) 400,000 share options with an exercise price of $3.00, where the average market price for the year was $4.00, and (b) $1,000,000 of 6% convertible loan notes, convertible into 250,000 ordinary shares. The tax rate is 25%. Calculate basic and diluted EPS.

Show the solution

Basic EPS = $2,400,000 ÷ 8,000,000 = 30.0 cents.
Options: free shares = 400,000 × (1 − 3.00 ÷ 4.00) = 400,000 × 0.25 = 100,000. No earnings change, so incremental EPS is nil.
Convertible: interest saved after tax = $1,000,000 × 6% × (1 − 0.25) = $45,000. Extra shares = 250,000. Incremental EPS = $45,000 ÷ 250,000 = 18 cents.
Rank from lowest: options (nil), then convertible (18 cents). Both are below basic EPS of 30 cents, so test in order.
Add options: $2,400,000 ÷ 8,100,000 = 29.63 cents. This is lower, so it dilutes.
Add convertible: ($2,400,000 + $45,000) ÷ (8,100,000 + 250,000) = $2,445,000 ÷ 8,350,000 = 29.28 cents. This is lower again, so it dilutes.

Answer: Basic EPS is 30.0 cents. Diluted EPS is 29.28 cents, after including both the options and the convertible loan notes.

Exam tips

Show every working: TERP, factor, weighted shares and incremental EPS. Method marks are given even if one number slips.
State any assumption, for example that the average market price is the one given or that conversion is at the start of the year. Clear assumptions earn professional skills credit.
Expect EPS inside a longer scenario, such as a group with non-controlling interest or a company under pressure to hit an EPS target. Read for ethics and earnings-management hints.
When asked to discuss, give a balanced view: what EPS tells the investor, what it hides, and which other measures (cash flow, return on capital, dividends) complete the picture.
Check that diluted EPS is not higher than basic EPS. If it is, you have probably included an anti-dilutive item or made a sign error.

Practice questions from Analysis and interpretation of financial and non-financial information and measurement of performance

Earnings per Share (IAS 33) and Investor Measures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Earnings per Share (IAS 33) and Investor Measures: frequently asked questions

How do I calculate diluted EPS when there is a rights issue?

First adjust the share count for the rights issue using TERP and the adjustment factor, and calculate basic EPS. Then add the potential shares from convertibles or options, using the ranking test by incremental EPS. Keep only the items that reduce EPS.

Why is the prior-year EPS restated after a bonus issue?

A bonus issue changes the number of shares without bringing in any resources. So IAS 33 treats it as if it had always existed. Restating the comparative keeps the two years comparable.

What is the bonus element in a rights issue?

A rights issue is treated as part bonus issue and part issue at full market price. The bonus element is the discount at which the new shares are offered compared with the market price. You adjust for it by multiplying the shares in issue before the rights issue by the factor (cum-rights price ÷ TERP). A pure bonus issue is a separate case: no cash comes in, so you use the ratio of shares after to shares before.

What are the main limitations of EPS?

EPS is based on accounting profit, so it depends on policies and estimates. It ignores cash flow, risk and the capital used to earn the profit. Buybacks can raise it without improving the business, and it is not reliably comparable across companies with different accounting policies or capital structures.

What does the P/E ratio tell you?

It shows how many times earnings the market is paying for a share. A high P/E can mean the market expects growth or sees lower risk. It can also mean earnings are temporarily low. Always compare it with similar companies and over time.