Earnings per Share (EPS)
Earnings per share, or EPS, is a company's net income minus preferred dividends, divided by the weighted average number of common shares outstanding. It measures the profit attributable to each share and is one of the most widely watched indicators of corporate profitability. EPS is the denominator's partner in the price-to-earnings ratio and a primary driver of share valuation.
Worked example
A company reports net income of $200 million and pays $20 million in preferred dividends, with 90 million weighted average common shares outstanding. EPS = ($200,000,000 − $20,000,000) ÷ 90,000,000 = $180,000,000 ÷ 90,000,000 = $2.00 per share.
Why it matters
EPS matters because it standardises profit on a per-share basis, letting investors track earnings growth and compute valuation multiples like the P/E ratio. The common pitfall is taking reported EPS at face value: companies can lift EPS simply by buying back shares, and one-off items or accounting choices can distort it. Comparing diluted EPS over several years gives a clearer picture than a single headline figure.
Frequently asked questions
What is the difference between basic and diluted EPS?
Basic EPS uses only currently outstanding shares, while diluted EPS also counts shares that could be created from options, warrants and convertibles. Diluted EPS is lower and more conservative, so analysts usually focus on it.
Is a higher EPS always better?
Not necessarily. A higher EPS is positive, but it must be judged against the share price and share count. EPS can rise from buybacks rather than real growth, so context matters more than the raw number.
Related terms: P/E Ratio, Graham Number