A company’s Basic Earnings Per Share (EPS) calculation is the ratio between its net profit and the total number of outstanding shares.
The company’s basic EPS calculation is the following:
EPS = (Net Income – Preferred Dividends) / Weighted Average Number of Shares Outstanding
The company removes the preferred dividend payments to preferred shareholders because those amounts are unavailable for common stockholders.
A company can also calculate its Diluted Earnings Per Share (Diluted EPS), which accounts for potentially dilutive securities such as stock warrants and options.
Example Basic EPS Calculation
Company ABC is a Delaware corporation formed on January 1, 2023. Its corporate charter authorizes the company to issue 1,000,000 shares of common stock and no preferred stock. After formation, the corporation issued 250,000 shares of common stock. The corporation wants to calculate its basic EPS for the 2023 fiscal year.
The corporation’s income statement shows the company’s net income after taxes of $100,000 for the period January 1, 2023 to December 31, 2023. The corporation’s total common shares outstanding are 250,000 on both January 1, 2023 and December 31, 2023.
The company calculates its basic earnings per share as follows:
EPS = ($100,000 – 0) / 250,000
EPS = $0.40
The corporation’s basic EPS is $0.40 per share common share outstanding.