Basic earnings per share, also known as Basic EPS, are the total amount of net profit accrued during a specified period, divided by the number of shares of stock issued by the company. A proper calculation of this figure helps the company to determine how much of those net profits actually belong to each of those outstanding shares. While not considered the most accurate of all processes to use in terms of stock analysis, this method is utilized by a number of analysts and investors, as well companies that issue shares of stock.
The easiest way to understand how to go about calculating a company’s basic earnings per share is to assume that a company had a total of $50,000,000 net profit in US dollars (USD). That same company had a total of 10,000,000 shares of stock outstanding. By dividing the $50M net profit by the 10M outstanding shares, the basic earnings per share is found to be $5 USD.
Analysts can make use of this calculation to place a value on the shares of stock, a factor that can be very important when it comes to trading the shares. In like manner, investors who are thinking of purchasing shares of the stock will also see this as a way of gauging the return that can be reasonably expected, based on the performance of the company during the period of time under consideration. Individuals can make use of the basic earnings per share to decide whether to hold on to the current shares, sell those shares, or attempt to purchase additional shares. Companies also use the determination of basic earnings per share as a measure of how well the company is doing in terms of increasing sales and thus generating profits.
If the basic earnings per share for a given period is less than the previous period, this is an indicator that something has changed. That change does not necessarily mean the company is headed for financial difficulty. The net profit generated from the period may have decreased due to changes in the pricing structure of the products produced and sold. In addition, the retirement of some debts via balloon payments that came due during the period, or some other financial situation that was temporary and not likely to recur in upcoming periods. Should none of these types of events be the cause for the decrease in the basic earnings per share, company officers can begin an investigation, identify the factor or factors that caused the decrease, and take steps to correct those issues.