Basic Earnings Per Share (EPS)

Definition

Basic Earnings Per Share (EPS) is a financial measure that indicates a company’s profitability by revealing the portion of its profit allocated per outstanding share of common stock. It is calculated by dividing net income by the number of outstanding shares. Basic EPS does not factor in the potential dilution caused by stock options, convertible securities or other potential sources of additional shares.

Phonetic

Basic Earnings Per Share (EPS): /ˈbeɪ.sɪk ˈɝ:nɪŋz pɝ ʃɛər (iː.pɪ.ɛs)/

Key Takeaways

Sure! Here are three main takeaways about Basic Earnings Per Share (EPS):

1. Definition: Basic EPS is a profitability indicator used by investors to understand the amount of net income that is allotted to each share of common stock. It is calculated by taking the net income and subtracting any dividends on preferred stock, then dividing by the average outstanding shares.
2. Importance: EPS is quite essential as it gives investors a sense of the company’s profitability. It is often used to compare the profitability between companies within the same industry. A high EPS indicates high profitability and vice versa. Companies often aim to increase their EPS to attract more investors.
3. Limitations: While it’s a useful tool, EPS also has some limitations. It doesn’t consider the opportunity cost of capital and can’t be used to compare companies with different numbers of outstanding shares. Also, companies can artificially increase EPS through tactics like buybacks, which does not actually improve the firm’s profitability.

Importance

Basic Earnings Per Share (EPS) is a crucial financial term in business because it indicates a company’s profitability per outstanding share of common stock. It is derived by deducting all the business expenses, including taxes and preferred stock dividends, from the total profits and then dividing the result by the number of outstanding shares. Investors and analysts use this figure to assess the financial performance and stability of a company. In addition, it serves as a robust tool for comparing the financial health of different firms within the same industry. Therefore, a higher basic EPS often attracts investors as it suggests higher profitability.

Explanation

Basic Earnings Per Share (EPS) serves as a crucial tool for measuring a company’s profitability on a per-share basis, and it is often used by investors to compare entities within the same industry or to evaluate the profitability of their own investments. Essentially, it signifies the portion of a company’s profit allocated to each outstanding share of common stock. Basic EPS provides investors with a quantifiable measure of a company’s profitability and, more importantly, it offers a straightforward tool for comparing this metric with that of other companies. In addition to evaluating profitability, Basic EPS can also be used in calculating other important financial indicators such as the company’s Price to Earnings (P/E) ratio. Furthermore, Basic EPS can influence the financial decisions of both the company and potential investors. For example, if a company’s Basic EPS is increasing, it may decide to use its increased profit to reinvest in itself or distribute dividends to its shareholders. Conversely, investors might perceive a company with a steady or increasing Basic EPS as financially stable and making effective use of its resources, which might encourage further investment.

Examples

Here are three real-world examples of Basic Earnings Per Share (EPS): 1. Apple Inc.: In the first quarter reports of 2021, Apple reported a basic EPS of $1.68. This figure was calculated by dividing $28.76 billion (net income for the period) by the total outstanding shares (17.1 billion). 2. Amazon Inc.: For the year ending December 2020, Amazon reported an EPS of $41.83. To calculate this, Amazon took their net income of $21.33 billion and divided it by the average number of common shares outstanding during the period (about 500 million). 3. Microsoft Corporation: For the fiscal year ending in June 2021, Microsoft reported a basic EPS of $8.05. This was calculated by dividing their net income of $61.27 billion by their total number of common shares outstanding, roughly 7.6 billion. In each instance, the companies calculate the EPS by taking the net income available to common shareholders for the particular period and dividing it by the weighted average number of common shares outstanding during that period. This provides investors with a per-share profitability measurement.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Net Income
• Weighted Average Shares Outstanding
• Financial Reporting
• Common Stockholders
• Income Statement

Sources for More Information

• WallStreetPrep
• Investopedia
• WallStreetMojo
• Experian