Earnings Per Share (EPS): What It Is and How to Calculate

Earnings per share, or EPS, is a common way to measure a company’s profit per share. It shows how much of a company’s net income is available to each share of common stock. Investors and analysts often look at EPS to better understand a company’s financial health and overall performance. Below, we’ll break down:

• What EPS means
• How to calculate it
• How it’s used when making financial decisions 

We’ll also review a few things to remember when looking at numbers. 

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What is Earnings Per Share (EPS)?

EPS shows how much of a company’s profit goes to each share of common stock. It’s one of the key numbers people consider when deciding if a company is doing well. A higher EPS usually means the company makes more money for its shareholders. This makes it easier to compare companies, even if they’re different sizes or in different industries. EPS helps investors see what businesses are earning more per share and which ones may be falling behind. 

Why EPS Matters to Investors and Analysts

EPS may give a quick snapshot of how well a company is turning a profit. It’s often used to spot trends, compare companies, and get a sense of value. A steady or rising EPS may signal that a company is doing well, while a drop may raise questions and concerns. Investors and analysts use it to help decide where to put their money. 

How to Calculate Basic EPS

Basic EPS is one of the simplest ways to see how much profit is linked to each share. You’ll need certain numbers from a company’s financial statements to calculate it. 

The EPS Formula

To find basic EPS, use this formula:

(Net Income – Preferred Dividends) ÷ Weighted Average Shares Outstanding

This formula shows how much profit is left for common shareholders after preferred dividends are paid. The final number tells you how much of that profit is tied to each share. This formula is the starting point for other EPS types, like diluted EPS, which includes more adjustments. 

Breaking Down the Components

Here’s the specifics on each part of the formula:

• Net income is the company’s total profit after expenses and taxes.
• Preferred dividends are payments made to preferred shareholders, who are paid before common shareholders.
• Weighted average shares outstanding is the average number of common shares over a specific period, usually a year.

You subtract preferred dividends because that money isn’t available to common shareholders. The number of shares is also important. If there are more shares, each one gets a smaller slice of the total earnings. Each part of the formula determines the final EPS number, so you’ll need to understand how they work together. 

Step-by-Step Calculation Example

Let’s say a company has:

• Net income: $950,000
• Preferred dividends: $50,000
• Weighted average shares: 500,000

The formula would look like this:

($950,000 – $50,000) ÷ 500,000 = $1.80 EPS

This means each share represents $1.80 of the company’s profit. Investors use this number to compare the company’s earnings with others or track how it changes over time. 

Understanding Weighted Average Shares Outstanding

EPS is more accurate when it reflects the average number of shares over time, not just a snapshot. That’s why the formula uses weighted average shares outstanding instead of a single point-in-time number. Here’s why that matters and how to figure it out. 

Why Weighing Matters

The number of a company’s shares changes during the year due to stock buybacks, new share issues, or similar circumstances. The EPS will be off if you don’t account for those changes. The weighted average lines up the period for earnings and shares, giving a fairer picture of how much profit was earned per share. This step makes it harder to misinterpret how well a company is doing. 

How to Calculate Weighted Average Shares

To calculate weighted average shares, you account for how long each share count was in place during the year. Here’s a simple example: 

• A company had 400,000 shares for 6 months
• Then it issued 100,000 more, bringing the total to 500,000 for the next 6 months.

Here’s how to calculate:

(400,000 × 6/12) + (500,000 × 6/12) = 200,000 + 250,000 = 450,000 weighted average shares

This number gives a more accurate view of EPS by reflecting the timing of share changes throughout the year. 

Types of EPS

There’s more than one way to measure earnings per share. While basic EPS is the most common, some situations require a more detailed view. Here's a quick look at the two main types of EPS and how they differ. 

Basic EPS

Basic EPS is the standard version we’ve gone over so far. It uses reported net income and the number of common shares over a period. This type doesn’t include stock options or convertible bonds that could turn into more shares later. It leaves those out, so basic EPS gives a simplistic view of how much profit is tied to each existing share. 

Diluted EPS

Diluted EPS goes a bit further. It includes elements that could increase the total number of shares, such as:

• Stock options
• Convertible bonds
• Restricted stock units

This version uses an “if-converted” approach to see what EPS would look like if all those potential shares were added. It gives a more cautious estimate of earnings per share, something many analysts prefer when reviewing a company’s financial health. 

What Affects EPS and Its Accuracy

EPS may seem like a clear number, but some things can change it, or even make it slightly misleading. From company decisions to unusual events, here’s what affects how accurate or useful an EPS number is. 

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Corporate Actions and EPS Manipulation

Companies can take steps that change EPS without actually improving profits. For example: 

• Stock buybacks reduce the number of shares, which makes EPS look higher even if earnings stay the same.
• Issuing new shares does the opposite, spreading earnings across more shares and lowering EPS. 

Some companies use buybacks to make their EPS look better in the short term. You must look beyond the number and ask what’s driving the change.

One-Time Events and Accounting Choices

Certain events can temporarily boost or lower EPS. These include:

• Settlements or lawsuits
• Selling off assets
• Restructuring costs

On top of that, accounting methods can alter the numbers. A company may use different ways of recognizing revenue or expenses that make earnings look higher or lower than they are. Check the footnotes in financial reports to see if any of these items impact the numbers.

EPS in Action: How It’s Used in Investment Decisions

EPS is a key piece of how investors evaluate companies. It plays a role in investment strategies like pricing stocks, comparing performance, and tracking growth over time. Here are a few ways EPS is used in real-world investment decisions.

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EPS and the P/E Ratio

EPS is the bottom part of the price-to-earnings (P/E) ratio, which compares a company’s stock price to its earnings. This formula is simple: 

Stock price ÷ EPS

A lower P/E may mean a stock is underpriced. A higher one suggests investors expect more growth. Investors use this ratio to compare companies in the same industry and decide if a stock is reasonably valued or not. 

EPS Growth as a Performance Indicator

Looking at EPS over time tells you a lot about the company’s direction. If EPS is growing steadily, it often means the company is improving its operations and bringing in more profit. However, not all growth is equal. Some spikes may come from one-time events or accounting changes. It’s important to look at long-term patterns, not just single-year jumps. 

Comparing EPS Across Companies and Industries

EPS helps when you’re comparing companies in the same field. However, it’s not a one-size-fits-all. Some industries typically have higher or lower EPS averages. Company size and how they raise money, either through debt or equity, also impact the number. Pair EPS with other ratios and make sure you’re comparing apples to apples. 

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Limitations of EPS

EPS can be useful, but it doesn’t tell the whole story. Like any single metric, it has its limits. Here are a few reasons why investors should look beyond EPS before making decisions. 

Doesn’t Reflect Cash Flow

EPS is based on accounting numbers, not actual cash. A company may report strong EPS while still struggling to pay its bills. This is because EPS doesn’t show how much money is actually coming in or going out. Look at cash flow statements alongside EPS to get a clearer view of financial health. 

Ignores Company Size and Capital Structure

EPS doesn’t adjust for a company's size. A larger company may have the same EPS as a smaller one, even though they operate on a different scale. Also, how a company is funded, through debt or equity, changes how profits are spread across shares. That’s why other metrics like return on equity (ROE) or earnings before interest and taxes (EBIT) are also useful. 

Can Be Misleading Without Context

A higher EPS doesn’t always indicate strong performance. Companies employ tactics like share buybacks or one-time boosts to make their EPS appear better. Also, focusing too much on a single quarter leads to the wrong impression. Be sure to look at trends over time and read the footnotes in earnings reports or the full picture. 

Using EPS in Financial Planning

EPS can be useful for understanding how much profit a company earns on a per-share basis. It’s often used in stock analysis, but it’s not the only number that matters. Knowing how to read, calculate, and question EPS makes you a more informed investor. 

Key Takeaways

• EPS shows how much profit is tied to each share of common stock.
• Basic and diluted EPS offer different views depending on share count and potential dilution.
• Corporate actions, one-time events, and accounting choices can affect EPS.
• EPS plays a role in ratios like P/E and helps track company performance over time.
• EPS doesn’t reflect cash flow, company size, or the full financial picture.

Action Items

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FAQs

Do I get money from earnings per share?

Not directly. EPS shows how much profit is earned per share, but it doesn’t mean you’ll automatically get that amount. Companies might pay out part of their earnings as dividends, but that decision varies.

Does a stock split affect EPS?

Yes, a stock split affects EPS by increasing the number of shares, which lowers the EPS. However, it doesn’t change the company’s total earnings; it only changes how they are divided among shares. 

Which is better, P/E or EPS?

Neither is better on its own, as they each serve different purposes. EPS shows a company's profit per share, while the P/E ratio helps evaluate if a stock is fairly priced on those earnings. Investors frequently use both for a fuller picture.

What is the difference between earnings per share and dividends per share?

Earnings per share (EPS) show the profit a company earns per share, while dividends per share (DPS) show the amount of that profit paid out to shareholders. Not all earnings are paid as dividends. Some are kept by the company for growth or other reasons.