Definition:
Basic earnings per share (EPS) is a financial ratio that measures the amount of profit a company earns for each outstanding share of common stock. It’s a key indicator of a company’s profitability.
Formula:
Basic EPS = (Net Income – Preferred Dividends) / Weighted Average Common Shares Outstanding
Key points about basic EPS:
- Net income: Net income is the company’s profit after deducting all expenses.
- Preferred dividends: Preferred dividends are payments made to preferred shareholders before common shareholders.
- Weighted average common shares outstanding: This is the average number of common shares outstanding during the period.
- Profitability: A higher basic EPS indicates that a company is more profitable.
Why is basic EPS important?
- Profitability: Basic EPS is a key measure of a company’s profitability.
- Investor analysis: Investors use basic EPS to compare the profitability of different companies.
- Valuation: Basic EPS is a factor that is considered in the valuation of a company’s stock.
However, it’s important to note that basic EPS has limitations, such as not accounting for diluted shares or non-recurring items.
In essence, basic EPS is a financial ratio that measures a company’s profitability, and it’s a key metric used by investors and analysts.
