Basic Earnings Per Share
What is basic earnings per share?
Basic earnings per share (EPS) is a simplified valuation of the amount of a company’s profit that can be assigned to one share of that company’s stock. The formula is:
Basic earnings per share (EPS) = net income - preferred dividends/weighted average number of common shares outstanding
Where have you heard about basic earnings per share?
For companies with simplified capital structures – for example a company which only has common stock – basic EPS method is a useful way to quantify their own performance. However, companies with a complex capital structure can get a more accurate measurement by looking at diluted EPS.
What you need to know about basic earnings per share.
Due to the way that stocks trade, an advance in basic EPS can cause the value of a stock to fall in line with a company’s rise in earnings on a per share basis. However, an increase in basic EPS does not mean that the company is earning more on a gross basis. Any company could potentially buy back their shares, decreasing their count, and lay out their net income over less preferred dividends. A company’s basic EPS is able to increase even if the sum of their earnings decrease with a falling common share count.
Find out more about basic earnings per share.
If you are interested in basic earnings per share, take a look at our page for diluted earnings per share.