Basic Earnings Per Share

Basic Earnings Per Share (EPS) = (net income - preferred dividends)/average number of common shares outstanding (weighted).

Now that the formulaic stuff is out of the way, let's get to what it actually means. Basic EPS is an estimate or measurement (albeit rough) of how much of an institution's profit can be assigned to one share of that company's stock.

So, for example, let's say a new pogo stick craze hits the schoolyards of every town in America. Reluctant parents across the nation cave to the incessant demands of their children. Paulie's Pogo Emporium, LLC hits record revenues, resulting in a net income of $20 million, after all expenses are paid and Uncle Sam gets paid his protection money.

Paulie's issues its preferred stockholders some preferred dividends to the tune of $5 million, with a remaining earnings available to the common shareholders in the amount of $15 million. Beginning with 20 million common shares at the start of the year, Paulie's issued 4 million shares in the second half of the year. Consequently, the weighted average number of common shares would be 22 million (20 x 0.5) + (24 x 0.5) = 22.

If you divide the remaining $15 million available to common shareholders by the weighted average of 22 million, your basic EPS comes out to $0.68.