Definition
Earnings per share (EPS) is the part of a company's net profit that belongs to each common share, calculated by dividing the profit available to common shareholders by the number of shares outstanding.
How it works
The standard formula is EPS = (net income − preferred dividends) ÷ weighted average shares outstanding. Preferred dividends are subtracted because that money goes to preferred shareholders first. A weighted average is used because the share count can change during the year, for example when a company issues new shares or buys some back.
Companies usually report two versions. Basic EPS uses the shares that actually exist. Diluted EPS also counts shares that could be created from stock options, convertible bonds and similar instruments, so it is equal to or lower than basic EPS. EPS is the denominator of the price-to-earnings ratio, and its change over several years is a common way to track how profit develops per share.
EPS can rise without the business earning more. If a company buys back its own shares, the same profit is divided among fewer shares. Many companies also publish an adjusted EPS that leaves out items they consider one-off. Adjusted figures follow each company's own definitions, so it helps to compare them with the reported EPS prepared under accounting rules.
Example (hypothetical numbers)
Suppose Company X earned net income of $50,000,000, paid $5,000,000 in preferred dividends and had a weighted average of 15,000,000 common shares.
EPS = ($50,000,000 − $5,000,000) ÷ 15,000,000 = $3.00.
Next year net income and preferred dividends are unchanged, but buybacks cut the weighted average to 12,500,000 shares: $45,000,000 ÷ 12,500,000 = $3.60.
EPS rose by 20% even though the company's profit did not grow at all.
Common mistakes
- Treating rising EPS as proof of profit growth without checking whether the share count fell.
- Comparing one company's adjusted EPS with another company's reported EPS.
- Ignoring diluted EPS when a company has many options or convertible securities outstanding.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.