Why a Buyback Can Lift Earnings Per Share Without Lifting Profit

Original explainer

An increase in earnings per share does not always mean a business made more money. After buying back its own stock, a company can spread the same profit over fewer shares.

Basic earnings per share, or EPS, divides profit attributable to ordinary shareholders by the weighted average number of shares outstanding. The IFRS Foundation's IAS 33 overview explains these two components.

Consider a hypothetical company with AED100 million of attributable profit and 100 million weighted-average shares: basic EPS is AED1. If profit stays unchanged but weighted-average shares fall to 90 million, EPS becomes about AED1.11. That roughly 11% increase comes from the smaller denominator, not higher total profit.

Timing matters. Reported EPS uses the average share count across the period, not simply the number left on the final day. New shares issued through employee options can also offset part of a buyback's reduction.

The cash still has a cost. Money used to repurchase shares cannot simultaneously fund a new project or repay debt. A debt-funded purchase also brings interest costs. These effects can change future earnings, so the example deliberately holds profit constant.

As ACCA's educational guide notes, higher EPS is not the same as greater shareholder value. The price paid and the alternatives for the money matter; an EPS increase alone does not guarantee a higher share price.

The useful question is therefore not just whether EPS rose. It is how much came from better business performance, how much from fewer shares, and what the company gave up to achieve the change.

Sources: IFRS Foundation: IAS 33; ACCA: Share buybacks.

Archival photo: New York Stock Exchange, 2023. Jakub Hałun / Wikimedia Commons, CC BY 4.0. Cropped to 16:9 by Morval Universal.