basic earnings per share

Remember the day the light went out and your father brought out the small notebook where he wrote down how much fuel the generator was drinking, then divided it by the number of rooms in the house so everyone knew their fair share of the burden? Basic Earnings Per Share works the same way, except it is sharing profit, not pain.

A company makes money for the year. That money does not belong to the company alone, it belongs to everyone who owns a piece of it through shares. So the company takes its net profit, sometimes adjusted for preference dividends owed, and divides it by the number of ordinary shares that exist. Whatever comes out is the profit sitting behind every single share.

Say a company on the Nigerian Exchange has 10,000,000 ordinary shares and made ₦500,000,000 in profit last year after settling preference shareholders. Divide the two and each share carries ₦50 of earnings behind it. That number does not land in your account, but it tells you how hard your share is working.

Investors watch this figure closely because it feeds directly into how a share is priced. A company growing its earnings per share year on year is usually a company doing something right with the money it keeps. Someone in London comparing a Nigerian bank's shares to a UK bank's shares will often start right here, because it strips away the noise of company size and gets to the heart of profit per unit of ownership.

It is called basic because it uses the actual number of shares in issue today, no guessing about shares that could exist later from options or convertible instruments. That more cautious version has its own name, but basic is the plain, honest starting point.