Table of Contents

What Is Primary Earnings Per Share (EPS)?
What Is the Difference Between Primary🌌 EPS and Diluted EPSꦇ?
Example of Primary Earnings Per Share Calculation
What Does Primary EPS Tell You?
Why Is Primar🍷y (or Basic) EPS Important to Investors?
Is Primary﷽ EPS or Diluted EPS Bett𓂃er for Evaluating a Company?
The Bottom Line

Primary Earnings Per Share (EPS): What It Is, How It Works

By

澳洲幸运5开奖号码历史查询:Will Kenton

Updated October 08, 2024

Reviewed by

Andy Smith

Fact checked by

Michael Logan

What Is Primary Earnings Per Share (EPS)?

Primary earnings per share (EPS) is a measure of a company's earnings per common share, prior to the conversion of any outstanding convertible securities. It is one of two methods for categorizing shares outstanding. The other method is fully 澳洲幸运5开奖号码历史查询:diluted earnings per share.

The term "basic EPS" is more commonly used than "primary EPS." Basic EPS is the simpler method to categorize 澳洲幸运5开奖号码历史查询:outstanding shares, as it uses the number of shares currently available for trading. To calculate ba𒆙sic EPS, divide net income by the numb🤪er of shares outstanding.

Key Takeaways

Primary earnings per share (EPS) is a measure of a company's earnings per common share, prior to the conversion of any outstanding convertible securities.
It is one of two methods for categorizing shares outstanding. The other method is fully diluted earnings per share.
Primary earnings per share has largely been called basic earnings per share since 1998.
EPS can be calculated in many different ways depending on the accounting methods and assumptions the company uses, so investors taking EPS into account should understand how the EPS figure they are using was calculated.

Primary Earnings Per Share (EPS) — Investopedia / Michela Buttignol.

What Is ඣthe Dif🍷ference Between Primary EPS and Diluted EPS?

Primary EPS does not take into consideration the dilution of earnings available to each commonꦐ share upon the conversion of convertible securities or the exercise of certain warrants which may be outstanding. If there are securities outstanding that could be converted into c༒ommon shares, the primary EPS will be higher than fully diluted EPS.

Diluted EPS is more complicated to compute than primary EPS, but it is considered more conservative because it takes into account all the outstanding convertible shares, warrants, and options that could potentially be converted to tradable shares. If none of these 澳洲幸运5开奖号码历史查询:financial instruments are outstanding, dilu📖ted EPS and primary E𝐆PS will be equal.

EPS can be calculated in many different ways depending on the 澳洲幸运5开奖号码历史查询:accounting methods and assumptions the company uses. Investors taking EPS into account💫 in any decision-making process should understand how the EPS figure they are using was calculated.

Fast Fact

Primary earnings per share has largely been called 澳洲幸运5开奖号码历史查询:basic earnings per share since 1998.

Example of Primary Earn🏅ings Per Share Calculation

Let's say a company has a net income of $40 million and pays out $5 million in dividends to preferred stockholders. The company has 12 million shares outstanding for the first half of the quarter and 13 million shares outstanding for the second half, or an average of 12.5 million shares. In this case, you would calculate earnings per share as follows:

澳洲幸运5开奖号码历史查询: $40 million – $5 million = $35 million

$35 million ÷ 12.5 million shares = $2.80 per share share

Thus, this company's earnings came to $2.80 per share.

We can extend this example to include the effects of dilution. Let's say this company had 2 million convertible preferred shares. Now, the denominator (outstanding shares) becomes 14.5 million effective shares outstanding. Hence, $35 million ÷ 14.5 million shares = $2.41 per share. This allows us to see the effects of earnings dilution.

What Does Primary EPS Tell You?

Primary EPS, now most commonly referred to as "basic EPS" shows a company's net income for each common share before converting outstanding convertible securities.

Why Is Primary (or Basic) EPS Important to Investors?

Primary EPS is a commonly used metric among investors f෴or assessing the value of a company. The higher the primary EPS, the more profit a company♐ generates per share.

Is Primary EPS or Diluted EPS Better for Evaluating a Company?

Most often, diluted EPS presents a clearer picture of a company's financial standing since it considers a wider range of shares that could be diluted. In this way, the primary EPS may be overstated or greater than the diluted EPS.

The Bottom Line

Primary EPS, now typically described as basic EPS, shows the net income of a company for each common share without accounting for all of the company's convertible securities. Since this may represent a smaller stock of shares, primary EPS may present a higher value than diluted EPS, making it an important, but less effective measure for assessing corporate valuations.

Article Sources

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