What is the formula for calculating basic EPS?

To calculate basic EPS, you take the net profit earned by the business and divide it by the number of total outstanding shares (shares available for purchase) issued at year end.

What are the disadvantages of EPS?

Basic EPS does not take into consideration future dilutive share issuances, nor does it factor in any extraordinary or one-time events; therefore, basic EPS may not be an accurate reflection of the long-term performance of a company.

Which is better, EPS or NPS?

Basic earnings per share represent the profitability of a company, whereas NPS indicates customer loyalty. Therefore, the two metrics serve separate purposes.

Who benefits from EPS?

Basic earnings per share primarily benefit those shareholders by indicating how much of the total profit generated by the company is attributed to each share held.

Do you get money from EPS?

Basic earnings per share do not generate cash amounts directly; cash can be received either through dividend payments or by an increase in stock value (rising prices).

What is Basic Earnings Per Share (EPS)?

Basic EPS is an essential metric used by analysts to evaluate how well a company is performing financially. Basic EPS tells you how much profit a company is making per share of its outstanding stock, which allows you, as an investor, to rate the efficiency of each company's ability to create value for its shareholders relative to the other companies by comparing the basic EPS figures of all the companies within the same industry.

Key Takeaways

EPS is a means to assess the relationship between earnings and the total number of shares currently outstanding.

It helps investors to easily compare companies of different sizes based on their EPS.

It only includes currently outstanding shares when calculating the amount per share; it does not include future dilutive effects.

EPS is generally considered to be the first step in evaluating a company's overall financial performance.

Basic Earnings Per Share (EPS) helps investors assess what portion of a company's net profit is attributable to each share outstanding at the end of a specific time period. EPS is calculated by dividing the company's net income by the total number of shares outstanding.

The simplicity of the calculation makes it easier for investors to understand a company's earnings in a more straightforward way than reading through large amounts of year-over-year profit figures, and it enables investors to make apples-to-apples comparisons between similar companies at different points in time.

A positive trend in basic earnings per share indicates the company operates efficiently and creates greater shareholder value.

How is EPS Calculated - EPS Formula and Example

The basic EPS formula provides investors with a straightforward way to view the profitability of companies. In this case, EPS is calculated by dividing the total net profit earned over a specific period by the total number of outstanding or issued shares. This basic EPS calculation allows for better comparison of company performance between different companies.

For example, if ABC Ltd earned ₹5 crore in profit and had 50 lakh shares outstanding, dividing ₹5 crore by 50 lakh would provide ABC Ltd with an EPS of ₹10. Thus, the EPS of ₹10 means that each common share represented ₹10 of profit generated by ABC Ltd, and this makes it easier for investors to evaluate a company's performance against other companies in the market.

Also Read: What Is Net Profit and How to Calculate it?

There are five types of Earnings Per Share (EPS). Each of them is explained below. Among these, basic earnings per share are the most widely used measure for assessing profitability per share.

1.Reported EPS or GAAP EPS

The Reported Earnings per Share (EPS), also known as referred to as GAAP EPS, is derived from the company’s application of Generally Accepted Accounting Principles (GAAP). The Reported EPS contains all expenses, taxes, and one-time amounts. This figure appears in published financial statements and is commonly used to calculate the basic EPS ratio.

2.Ongoing or Pro Forma EPS

Ongoing EPS or Pro Forma EPS reflect the typical ongoing performance of the Company’s core business activities, by eliminating nonrecurring and unusual expense items. This allows for a better understanding of how a company has performed based solely on its core business activities over time, without the issues of the temporary effects of nonrecurring events.

3.Retained EPS

Retained EPS represents the portion of the Company’s earnings retained for future use after payment of dividends. Retained Earnings will typically be utilized to reinvest in the Company for future growth.

4.Cash EPS

Cash EPS reflects a Company’s earnings from a pure cash perspective and provides investors with a comprehensive view of both Liquidity and Business Operating Strength.

Understanding basic earnings per share is helpful for investors in determining the financial health of a company. By looking at Basic EPS, an investor can see how much profit there is per common share, which gives them the ability to see how much actual profit is earned from a particular business, as well as being able to compare companies of different sizes without confusion when assessing their profits.

Basic EPS is also helpful when assessing company performance over a period of time, so that they can identify companies that consistently grow their earnings.

Basic EPS directly ties profit to the shareholder and therefore serves a critical role in assessing the stock and making more informed decisions on whether to invest or not.

Stock dilution: Basic EPS does not factor in the effect of an option, warrant, or convertible securities that could dilute current earnings per share.

Extraordinary items: These are one-time events that have either a gain or a loss that do not accurately reflect ongoing business performance.

Convertible securities: They include potential shares from conversion instruments like options, warrants, and convertible debt. These potential shares are not considered when determining a company's earnings per share, leading to a potentially overstated profitability.

Limited View: Basic earnings per share provide only a snapshot of the company's current earnings and should not be the sole basis for making an investment decision.

Difference between Basic EPS and Diluted EPS

The difference between Basic EPS and Diluted EPS lies in the fact that they have different ways of counting the number of shares to calculate earnings per share. Basic EPS refers to the number of shares that are currently outstanding and therefore represent the company's actual profits.

Diluted EPS includes all possible shares (including those issued under a stock option plan or convertible bond) in its calculation of earnings per share. Because of this adjustment to the statement of earnings, diluted EPS provides a more cautious estimate of profit levels for future periods.

Conclusion

The basic EPS provides insight into a company's performance in a manner that is easy to interpret. The basic EPS meaning and how basic earnings per share will help you understand the relationship between the company's profits and its shares that are currently outstanding, and why this has meaning for you as an investor. Tracking results over time will produce clearer trends, enabling better comparisons among companies.

The use of basic eps in conjunction with other performance measures creates a more balanced perspective when making decisions about individual companies. Since it has limitations, the basic eps ratio serves as a dependable foundation when evaluating the profitability and value that companies provide to shareholders.