What you will learn
- Relate profit and equity to the correct denominator.
- Distinguish the total share count from the tradable float.
Earnings Per Share (EPS)
Basic EPS divides profit attributable to ordinary shareholders, after preferred dividends, by the weighted average number of shares in issue during the period. Diluted EPS also counts shares that could be created by options, warrants or convertible securities, giving a more cautious figure.
EPS can rise because profit grows or because buybacks reduce the share count, and one-off gains, write-downs and accounting choices can distort it. It is the denominator of the P/E ratio and is reported in the company's reporting currency, which may differ from the currency the share trades in.
Return on Equity (ROE)
ROE usually divides the past twelve months' net income by average shareholders' equity. A higher ROE means more profit per unit of equity, and it is driven by three things: profit margin, how efficiently assets generate sales, and financial leverage, meaning assets funded by debt rather than equity.
Because debt-funded assets need less equity, a company can raise its ROE simply by borrowing more or buying back shares while becoming riskier. A very small or negative equity base can make ROE look extreme or meaningless, so compare it with peers, its own history and its debt levels.
Free Float
Index providers and many data vendors use free float to scale a company's weight so that an index reflects what investors can actually buy. A company with a large controlling stake can have a big headline market cap but a much smaller free-float market cap, and therefore a smaller weight.
Free float also hints at liquidity: a small float can make prices move more on modest orders and make large positions harder to enter or exit. Definitions differ between providers, including which holders count as strategic, and the figure changes after share sales, placements and lock-up expiries.
Worked example: Changing share counts
Illustrative: Company A earns HK$12 million and has 6 million weighted-average shares, giving EPS of HK$2. If the same profit is divided across 8 million weighted-average shares, EPS is HK$1.50. A smaller public float does not replace the accounting share-count denominator. Changes in accounting measures must be interpreted with the reporting period and dilution assumptions.
Check your understanding
With HK$9 million of earnings and 3 million weighted-average shares, what is EPS?
Show answer and explanation
EPS = 9 million ÷ 3 million = HK$3. This arithmetic alone says nothing about cash generation, recurring earnings or whether a market price is reasonable.