Earnings per Share (EPS)

Definition

The financial ratio earnings per share, or EPS, is perhaps the single most popular variable used by analysts and investors to evaluate the profitability of a company.  EPS measures the profitability of a company on a per share basis.

Calculation

Earnings per Share = (Net Income - Preferred Dividends) / Shares Outstanding

Explanation

A profitability ratio, earnings per share provides the investor with a measure of the profits of a company, as generated for each share of common stock outstanding.  Since the number of shares outstanding can change over time, the metric typically uses a weighted average value.

There are several variations on the earnings per share calculation, including:

  • Diluted EPS: which uses the outstanding shares plus convertibles or warrants outstanding
  • Trailing EPS:  which uses last year's earnings and common shares (the actual EPS reported in financial statements)
  • Current EPS:  which uses the current year's projected earnings
  • Forward EPS:  which is typically based on analysts' projections for a future year

Example

Company A's income statement indicated net income of $4,283,000, and no payment of preferred dividends.  The weighted average number of common shares outstanding for this same time period was 706,766.  The trailing EPS for Company A would be:

= ($4,283,000 - $0) / 706,766, or $6.06 per share

Related Terms

net income, retained earnings, fully diluted earnings per share, statement of retained earnings, diluted earnings per share