Earnings per Share (EPS): What It Is & How It Works (2024)

EPS, which stands for earnings per share, represents a company's annualized net profit divided by the number of common shares of stock it has outstanding. Because it's a measure of profitability on a per-share basis, EPS is commonly used by investors to estimate the value of a company, per share.

In simple terms, EPS is a calculation that shows how profitable a company is, per share. So, EPS can be described as the amount of money each share of stock would receive if a company's profit was distributed to shareholders at the end of the year.

EPS Formula & Calculation

To calculate EPS, you'll first subtract any preferred dividends from the company's net income, then divide by the number of share of common stock outstanding.

The EPS formula looks like this:

EPS = (Net Income - Preferred Dividends) / Common Shares Outstanding

For a simple example of calculating EPS, let's say XYZ Company has net income during the year of $1,000,000 and there are no preferred shares outstanding. XYZ company had 500,000 shares of common stock outstanding during the year.

Here's the EPS calculation:

(1,000,000 - 0) / 500,000 = $2.0

See Also

Earnings Per Share (EPS) - Meaning, Importance, Formula, Limitations, And More - Glossary by Tickertape

Tip:To find the numbers you need to calculate EPS for yourself, you can look at a company's public filings. Publicly traded companies are required to file quarterly Form 10-Q and an annual Form 10-K with the Securities Exchange Commission, or SEC. If there are any preferred dividends, subtract them from the annual net income. Then you can divide this number by the number of shares of stock it has outstanding.

What Is EPS Used For?

EPS can be used for more than just finding the profitability of a company on a per-share basis. EPS is also used in other valuation metrics, such as the Price-to-Earnings ((P/E)) ratio, which is a company's share price divided by its earnings per share, and the

Price/Earnings-to-Growth (PEG) ratio, which is the company's P/E divided by its growth rate over a certain period of time.

4 Types of EPS

The standard earnings per share calculation is often referred to as basic EPS. But there are other types of earnings per share, the main ones being diluted EPS, EPS from continuing operations, and EPS excluding extraordinary items.

The 4 types of earnings per share metrics are:

• EPS: This is the standard EPS calculation, which is net income minus preferred dividends, divided by common shares outstanding.
• Diluted EPS: This EPS calculation takes into account a company's convertible securities.
• EPS from continuing operations: This only includes EPS from day-to-day operations and does not include discontinued operations, extraordinary items or accounting changes.
• EPS excluding extraordinary items: This EPS calculation excludes items that are not ordinary in a company's operations, such as the recorded gain or loss on the sale of a large asset, which could skew the results of a EPS calculation.

EPS vs. Diluted EPS

When comparing EPS vs. diluted EPS, the primary difference is that diluted EPS accounts for convertible debt and employee stock options. Some investors believe that diluted EPS can give a more accurate assessment of a company's financial condition than basic EPS. This is because it usually increases the share count, making diluted EPS lower than basic EPS.

Here's the formula for calculating diluted EPS:

Diluted EPS = (Net Income - Preferred Dividends) / (Common Shares + Diluted Shares)

The definition of diluted shares is the number of shares of stock that would exist if all of a company's convertible securities were converted to common shares of stock. Examples of convertible securities are convertible bonds, preferred stock, and employee stock options.

What Is a Good EPS?

Whether EPS is good or bad depends upon multiple factors, such as recent performance of the company or the performance of the company's competitors or industry. Investors usually assess whether an EPS is good or bad relative to the consensus of EPS expectations from analysts that cover the stock. For example, a growing EPS can be good but if it misses the analysts' estimate price target, the stock price could fall.