What is Basic EPS?
The term “basic EPS” refers to the amount of the company’s net earnings that are allocable to the common stockholders at the end of a specific period of time (quarterly or yearly). More importantly, basic EPS is built on the premise that none of the convertible securities (such as convertible preferred shares, employee stock options, etc.) will be converted to common stock and as such, it is calculated straight away on the basis of company’s net income minus dividends for preferred shares. Basically, for basic EPS (Earnings Per Share) it is believed that none of the convertible securities will be exercised during the given period of time. Also, please bear in mind that a company may not pay-out the entire net earnings to the shareholders because it may partly distribute the earnings while it may re-invest the remaining earnings into the business to explore further growth opportunities.
Formula
The formula for basic Earnings Per Share can be derived first by deducting the dividends paid to the preference shareholders from the net income generated by the company and then dividing the result by the weighted average number of common shares outstanding. Mathematically, it is represented as,
Examples of Basic EPS (With Excel Template)
Let’s take an example to understand the calculation of Basic EPS in a better manner.
Example #1
Let us take the example of a company that is engaged in the manufacturing of shoes and has its facility in the village of Wheeling, Illinois (USA). During the year 2018, the company booked net income of $30 million. Further, it paid out dividends of $3 million to owners of the preference shares. At the start of the year, the company had 8.5 million common stock, while during the year it issued another 1 million common stocks. Calculate the basic EPS of the company for the year 2018 based on the given information.
Solution:
No. of common shares outstanding at the end of the year is Calculated as
- No. of common shares outstanding at the end of the year = 8.5 million + 1.0 million
- No. of common shares outstanding at the end of the year = 9.5 million
Weighted Average Number of Common Shares Outstanding is calculated using the formula given below
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Weighted Average No. of Common Shares Outstanding = (No. of Common Shares Outstanding at Start of the Year + No. of Common Shares Outstanding at End of the Year) / 2
- Weighted Average No. of Common Shares Outstanding = (8.5 million + 9.5 million) / 2
- Weighted Average No. of Common Shares Outstanding = 9.0 million
Basic EPS of the company is calculated using the formula given below
Basic EPS = (Net Income – Preferred Dividend) / Weighted Average No. of Common Shares Outstanding
- Basic EPS = ($30.0 million – $3.0 million) / 9.0 million
- Basic EPS = $3.0 per share
Therefore, the company managed an Earnings Per Share of $3.0 per share during the year 2018.
Example #2
Let us take the example of Apple Inc. to illustrate the computation of basic EPS based on its latest annual report. During 2018, Apple registered a net income of $59.53 billion and the weighted average number of common shares outstanding during the period was 4.96 billion. Calculate the basic EPS of the company based on the given information.
Solution:
Basic EPS of the company is calculated using the formula given below
Basic EPS = (Net Income – Preferred Dividend) / Weighted Average No. of Common Shares Outstanding
- Basic EPS = ($59.53 billion – 0) / 4.96 billion
- Basic EPS = $12.0 per share
Therefore, Apple Inc.’s basic EPS for the year 2018 stood at $12.01 per share.
Source Link: Apple Inc.Balance sheet
Example #3
Let us also take the example of Walmart Inc.’s latest annual report for the year 2018 to illustrate the calculation of basic EPS. As per the annual report, the company’s net income for the period stood at $10.52 billion, while it had to pay out $0.66 billion to the non-controlling interest. During the period the weighted average no. of common shares outstanding was 3.00 billion. Calculate the basic EPS of the company based on the given information.
Solution:
Basic EPS of the company is calculated using the formula given below
Basic EPS = (Net Income – Pay-Out to Non-Controlling Interest) / Weighted Average No. of Common Shares Outstanding
- Basic EPS = ($10.52 billion – $0.66 billion) / 3.00 billion
- Basic EPS = $3.29 per share
Therefore, Walmart Inc.’s managed basic EPS of $3.29 per share for the year 2018.
Source Link: Walmart Inc.Balance Sheet
Advantages of Basic EPS
Some of the major advantages of basic EPS are:
- It helps in determining the basic earnings per stock which are good for academic purposes.
- It uses easy steps of calculation as it doesn’t involve the complexity of potential earnings dilution due to convertible shares.
Limitations of Basic EPS
Some of the major limitations of basic EPS are:
- It is less useful for the investors as it fails to capture the impact of the convertible shares if exercised.
- It can be easily manipulated using various techniques, one of the most used techniques is buying back shares.
Conclusion
So, basic EPS is a good indicator of a company’s financial performance. But in order to have a better understanding, it is important to analyze it in conjunction with the stock price and an outstanding number of common shares.
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