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.
Related or Semi-related Video
Finance: What are retained earnings?26 Views
Finance allah shmoop what are retained earnings You know when
you eat really salty food and the next day you
have cankles it's all that water desperately trying Teo get
youto wiz out the loads of sodium chloride in your
body That's retained water well retained earnings and i'll sort
of work the same way you run a plastic cup
stamping business with catchy little phrases on the cubs Last
year you had a million bucks in sales and one
hundred grand in after tax earnings About eighty grand of
that earnings was in fact cash Why didn't you retain
in cash one hundred percent of your earnings What happened
to the twenty grand in cash there How did evaporate
Well you had to spend cash out of your earnings
on a cup plunging machine and then cost real cash
dough You'll amber ties that cost over time now and
get essentially a tax break because of it meaning you'll
show lesson earning so you'll pay less in taxes but
the cash won't change So this year's hundred grand was
a nice year but last year you had fifty grand
in cash profits and you had twenty grand in cash
Profits the year before then and before then you had
run it just cash flow break even for the previous
five years So it all looked like that So in
total you saved Or rather you retained cash earnings of
eighty plus fifty plus twenty or a sum total of
one hundred fifty grand That all now sits in your
b of a account doing a whole lot of nothing
of intern two percent a year for the privilege that
one hundred fifty grand that you have cumulatively retained Like
ankle's swelling is retained earnings which you will now use
to print more catchy titles in foreign languages Maybe don't
look up What those mean All right let's close the 00:01:49.043 --> [endTime] video now
Up Next
What is Earnings Per Share (EPS)? Earnings Per Share is a metric by which to measure the profitability of a public company as a result of how much...
Normalized earnings are, more or less, the average of what you typically earn. Picture a bell curve. Zoom in on the middle of it. There you go.
