What is basic earnings per share’
Basic earnings per share is a rough measurement the amount of profit that can be allocated to one share of its stock. Basic earnings per share is not included in the dilutive effect of convertible securities. Basic earnings per share is calculated as follows:
Basic earnings per share = (Net income – preferred dividends) / weighted average number of ordinary shares outstanding
Breaking down ‘basic earnings per share’
Basic earnings per share for companies that have complex capital structure, that is, they have issued potentially dilutive securities, diluted earnings per share is considered a more accurate indicator than earnings per share. Diluted earnings per share takes into account all of the outstanding dilutive securities that could potentially be implemented (e.g. stock options and convertible preferred stock) and shows how this measure will impact on earnings per share.
If the company has a simple capital structure, it means that he had not issued any potentially dilutive securities, basic EPS can be a useful metric on their own. Companies with a complex capital structure must report basic earnings per share and diluted earnings per share to provide a more accurate picture of their earnings per share. Basic earnings per share is always above two. If the company has a simple capital structure, it needs only to report basic earnings per share.
Basic Earnings Per Share Example
The company reported a net profit of $100 million after expenses and taxes. The company produces preferential dividends of preferred shareholders in the amount of $ 23 million, leaving a profit available to ordinary shareholders of $ 77 million. The company had 100 million common shares outstanding at the beginning of the year and issued 20 million new ordinary shares in the second half. As a result, the weighted average number of common shares outstanding $ 110 million: 100 million shares during the first half of the year and 120 million shares for the second half of the year (100 x 0.5) + (120 x 0.5) = 110. Dividing earnings available to common shareholders of $77 million, by the weighted average number of ordinary shares in circulation in the amount of 110 million gives earnings per share of $0.70.
The impact to basic earnings per share
Shares trade at multiples earnings per share, so the growth in underlying earnings per share can cause the share price to appreciate in line with the increase in the profits of the Company per share basis. The increase in basic earnings per share, however, does not mean that the company generates more revenues on a gross basis. Companies can buy back shares, reducing their number in the result and distribute the net income less dividends on preferred shares less the number of ordinary shares. Basic earnings per share can grow even if the absolute profit will decrease with the fall in the total number of shares. Another consideration for basic earnings per share is its deviation from the diluted earnings per share. If two indicators EPS is everything else, it may show that there is a high potential for current shareholders to be diluted in the future.