Definition:

Basic Earnings Per Share (EPS) is a financial metric that measures the amount of a company's profit allocated to each outstanding share of common stock, indicating a company's profitability on a per-share basis.

Formula:

Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding

How to use the metric:

Investors and analysts use Basic EPS to assess a company's profitability and compare it with other companies in the same industry. It helps in evaluating the company's financial performance and making informed investment decisions.

Limitations:

Basic EPS does not account for the potential dilution of shares from convertible securities, stock options, or warrants. It also does not consider the impact of extraordinary items or non-recurring events, which can skew the results.

Applies to:

Basic EPS is applicable across most industries, particularly where companies have straightforward capital structures without complex financial instruments.

Doesn't apply to:

Industries with complex capital structures, such as financial services or technology companies with significant stock options and convertible securities, may find Basic EPS less informative. In such cases, Diluted EPS provides a more comprehensive view.

Summary:

Basic EPS is a key metric for evaluating a company's profitability on a per-share basis, useful for comparing performance across companies. However, it has limitations in accounting for potential share dilution and extraordinary items, making it less suitable for companies with complex capital structures.