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Definition: Primary Earnings Per Share
There are 2 ways to categorize the shares outstanding. One would be using a Primary EPS and the other being using Diluted EPS. EPS refers to Earnings Per Share in common parlance. The term used more often, is Basic EPS instead of Primary EPS. EPS is calculated by dividing the net income of a firm by the number of outstanding shares.
On the other hand, diluted EPS is more complicated and more conservative given that it takes into consideration the account of all the outstanding convertible shares, options and warrants which could be converted into shares which can then be traded. If in the situation that a firm has no stock options, warrants etc., the Primary Earnings Per Share is the same as the Diluted Earnings Per Share.
There are many ways to calculate Earnings Per Share based on the accounting methods and the assumptions that a company uses. Investors usually take EPS into account to understand the kind of returns to expect on their investments but it is important for the investor to know the way the EPS has been calculated. Without the knowledge of this, the investor can be misled into believing that the firm is performing differently from what it actually is.
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