Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary equity holders of the parent company by which of the following? The weighted number of shares that will be issued on conversion of potential shares. The weighted average number of ordinary shares outstanding during the period. The average number of contingently issuable ordinary shares issued during the period.

Basic earnings per share (Basic EPS) is calculated by dividing the profit or loss attributable to ordinary equity holders of the parent company by the weighted average number of ordinary shares outstanding during the period. 12

📊 Weighted Average Number of Ordinary Shares

• Weighted Average Calculation：The weighted average number of ordinary shares outstanding during the period is a critical component in the calculation of Basic EPS. This figure takes into account the number of shares outstanding at different points in time, weighted by the proportion of the period they were outstanding. For example, if a company has 100,000 shares outstanding for the first six months and 150,000 shares for the second six months, the weighted average would be calculated as follows: (100,000 * 6/12) + (150,000 * 6/12) = 50,000 + 75,000 = 125,000 shares. This method ensures that the EPS calculation reflects the actual number of shares that were available to shareholders throughout the period. 34

• Impact of Share Issuances and Repurchases：Share issuances and repurchases during the period can significantly affect the weighted average number of shares. For instance, if a company issues new shares midway through the year, the EPS calculation must reflect the additional shares from that point onward. Conversely, if the company repurchases shares, the reduction in shares must be accounted for in the weighted average calculation. This dynamic nature of share count ensures that the EPS figure is a true reflection of the company's profitability relative to the number of shares available to shareholders. 15

🔄 Conversion of Potential Shares

• Dilutive Effect：The conversion of potential shares, such as stock options, warrants, and convertible securities, can dilute the EPS if these shares are converted into ordinary shares. However, this conversion is not considered in the calculation of Basic EPS. Basic EPS only accounts for the actual number of ordinary shares outstanding during the period. The potential dilution effect is captured in the calculation of Diluted EPS, which includes the impact of all potentially dilutive securities. 24

• Distinction Between Basic and Diluted EPS：Basic EPS provides a straightforward measure of profitability per share, reflecting the earnings attributable to each ordinary share. In contrast, Diluted EPS takes into account all potential sources of dilution, providing a more conservative measure of earnings per share. Investors often compare both Basic and Diluted EPS to understand the potential impact of dilutive securities on their share of the company's earnings. 13

📈 Contingently Issuable Shares

• Contingent Issuance Conditions：Contingently issuable shares are shares that may be issued under certain conditions, such as the achievement of specific performance targets. These shares are not included in the calculation of Basic EPS unless the conditions for their issuance have been met. The inclusion of contingently issuable shares in the EPS calculation depends on whether the conditions have been satisfied by the end of the reporting period. If the conditions are met, these shares are included in the weighted average number of shares outstanding. 45

• Impact on EPS Calculation：The inclusion of contingently issuable shares can affect the EPS calculation if the conditions for their issuance are met. For example, if a company has a performance-based stock award plan and the performance targets are achieved, the shares issued under this plan would be included in the weighted average number of shares. This inclusion would reduce the EPS, reflecting the additional shares that are now available to shareholders. 34

🛠️ Practical Steps for Calculating Basic EPS

• Step 1: Determine Net Profit or Loss：The first step in calculating Basic EPS is to determine the net profit or loss attributable to ordinary equity holders of the parent company. This figure is typically found in the company's income statement. 12

• Step 2: Calculate Weighted Average Shares：Next, calculate the weighted average number of ordinary shares outstanding during the period. This involves summing the product of the number of shares outstanding at each point in time and the proportion of the period they were outstanding. 34

• Step 3: Divide Net Profit by Weighted Average Shares：Finally, divide the net profit or loss attributable to ordinary equity holders by the weighted average number of ordinary shares to arrive at the Basic EPS. This calculation provides a clear measure of the company's profitability per share. 15

In summary, Basic EPS is a fundamental financial metric that provides insight into a company's profitability on a per-share basis. By understanding the components and calculation methods involved, investors can make more informed decisions based on the financial health of the companies they are considering for investment. 24