How to Find Earnings Per Share: A Quick Guide

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Earnings per share (EPS) is one of those terms that gets thrown around a lot in investing, but what does it really mean? And why does it matter? Whether you're exploring investing for the first time or just trying to better understand how companies measure success, learning about EPS can help you make smarter financial decisions.

In this guide, we’ll walk through what EPS means, why it’s important, and how to calculate it using simple, clear examples. By the end, you’ll have the confidence to interpret this key metric and use it to make smarter financial decisions.

Key Takeaways

• Earnings Per Share (EPS) measures how much profit a company generates per share of its stock.
• The formula for basic EPS is:
  EPS = (Net Income - Preferred Dividends) / Average Outstanding Shares
• There are variations of EPS, including diluted EPS, which accounts for potential shares from convertible securities.
• EPS is widely used by investors to assess a company’s financial health and compare it with peers.

What Is Earnings Per Share (EPS)?

Earnings per share represents the portion of a company’s profit allocated to each outstanding share of common stock. It’s a key indicator of profitability and often serves as a foundation for valuing stocks.

A higher EPS generally suggests that a company is more profitable, though it’s always important to consider other metrics and industry context.

Why Does EPS Matter?

EPS shows how much profit a company makes for each share of stock, making it easier to compare companies and see how they’re performing. Think of it as a simple way to cut through the clutter of financial data and get a quick read on profitability.

Hypothetical Example: If Company A has an EPS of $5 and Company B has an EPS of $3, Company A is generating more profit per share. However, this doesn’t automatically mean it’s a better investment—other factors like growth potential and debt levels also matter.

How to Calculate Basic EPS

The basic EPS formula is straightforward:

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

Let’s break it down:

• Net Income: The company’s total profit after taxes and expenses.
• Preferred Dividends: Dividends paid to preferred shareholders, subtracted because EPS focuses on common stock.
• Average Outstanding Shares: The average number of common shares held by investors during a reporting period.

Hypothetical Example:

Imagine a company has the following:

• Net Income: $1,000,000
• Preferred Dividends: $100,000
• Average Outstanding Shares: 500,000

Using the formula:

EPS = ($1,000,000 - $100,000) / 500,000 EPS = $900,000 / 500,000 EPS = $1.80

This means the company earned $1.80 per share during the reporting period.

What About Diluted EPS?

Diluted EPS accounts for potential shares that could be created through stock options, warrants, or convertible securities. It provides a more conservative view of profitability since it assumes the share count could increase.

The formula is similar but includes the impact of these additional shares:

Diluted EPS = (Net Income - Preferred Dividends) / (Average Outstanding Shares + Potential Shares)

Hypothetical Example:

Let’s adjust the earlier example to include:

• Potential Shares: 50,000

Diluted EPS = ($1,000,000 - $100,000) / (500,000 + 50,000) Diluted EPS = $900,000 / 550,000 Diluted EPS = $1.64

In this case, the diluted EPS is lower, reflecting the impact of potential share dilution.

Using EPS for Investment Decisions

EPS is just one piece of the puzzle, but it can be a helpful tool when aligning investment strategies with specific goals. For instance, EPS can guide decisions between growth stocks and value stocks. Companies with high EPS and consistent growth may appeal to value investors looking for stability, while those with lower or negative EPS (common in startups) might attract growth investors willing to take on more risk for higher potential rewards.

EPS’s relevance also varies by industry. In sectors like technology or startups, companies often prioritize reinvestment over immediate profitability, leading to lower EPS. In contrast, industries like utilities or consumer goods often rely on steady EPS to signal stability and consistent performance.

Discussion of Limitations:

While EPS is a valuable metric, it’s important to understand its limitations. Accounting practices, for example, can sometimes manipulate net income, which directly affects EPS. Additionally, focusing too heavily on EPS might lead to overlooking other crucial factors, like cash flow or market conditions. To make well-rounded decisions, consider combining EPS with metrics like the Price-to-Earnings (P/E) ratio, revenue growth, and broader market trends. Linking EPS to an overall investment strategy helps provide clarity on whether a stock aligns with your financial goals.

Common Questions About EPS

1. Is a higher EPS always better?

Not necessarily. A higher EPS indicates more profit per share, but you should also consider the company’s growth prospects, debt levels, and industry conditions.

2. What’s the difference between basic and diluted EPS?

Basic EPS focuses on current shares, while diluted EPS includes potential shares from convertible securities or options.

3. Can EPS be negative?

Yes. A negative EPS means the company is losing money during the reporting period.

4. How often is EPS reported?

Public companies typically report EPS quarterly and annually as part of their earnings reports.