Takeaways
- Earnings Per Share (EPS) is a metric that calculates relative corporate value.
- EPS is a widely used investor barometer of company performance.
- Investors value high EPS because it is a marker of profits relative to ownership.
- EPS can be calculated in many ways to account for events like discontinued operations.
- EPS is calculated as net income less preferred dividends divided by common shares outstanding.
Understanding financial statements and ratios is crucial if you learn to invest or own stocks. One financial ratio you will often see is Earnings Per Share (EPS). Financial media and investors of all types constantly discuss the quarterly and projected EPS of their favorite companies. Here's what you need to know.
Read More: Best Online Brokerage Accounts
Take the Next Step:
Acorns Website
Acorns Investing App
Smart Money Rating: 5/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
Annual Fee: N/A
Earnings Per Share (EPS) measures a company's profitability by dividing its total earnings by the number of outstanding shares. It acts as a financial snapshot, showing investors how efficiently a business generates profit per common stock outstanding.
EPS tells investors how much profit a company makes for each share of its stock. The higher the EPS, the better the company generates profit for its shareholders. It's a straightforward metric that shows investors a vital part of the profitability story for any company.
EPS also allows investors to easily compare profitability between companies, even if the businesses vary significantly in size, scope, and industry.
Read Also: 11 Stock Market Sectors to Know
Here’s How EPS Is Calculated
The calculation for EPS is relatively simple, although there are more complex forms of the formula based on investor preference. To calculate earnings per share, you take a company’s net income and subtract preferred stock dividends. From there, you divide the total number of outstanding common shares.
To gather the inputs to EPS, you will need to access a company’s financial statements. Net income and preferred dividend payments can be found on the income statement (sometimes referred to as the Profit & Loss Statement). The period-ending common shares outstanding can be found on the Balance Sheet.
Smart Tip:
A publicly traded company’s quarterly and annual financial statements are available on its website or the Securities and Exchange Commission website.
- Net Income: Total earnings (profit) of a company after cost of goods, operating expenses, taxes, and other charges have been paid.
- Preferred Dividends: Dividends that are paid to preferred shareholders before common shareholders. Not all companies issue dividends, so check the income statement. (Read more about dividend-paying stocks).
- Outstanding Common Shares: The outstanding common shares at the end of the period are reported on the balance sheet. However, some investors prefer using the average number of shares outstanding during a specific period to get a more accurate view.
For example, if a company has a net income of $1 million, paid $100,000 in preferred dividends, and has an average of 450,000 shares outstanding. The EPS would be calculated as:
Earnings Per Share = ($1,000,000 - $100,000) ÷ 450,000
Earnings Per Share = $900,000 ÷ 450,000
Earnings Per Share = $2 per share
A $2 EPS means the company earned $2 profit for each share of outstanding common stock. Whether this is an excellent performance depends on contrasting it with peer companies.
On its face, EPS is difficult to assess in isolation. Investors typically evaluate a company's EPS alongside ratios like dividend yield, price to earnings (P/E), revenue growth, and other financial metrics. It is a smart money move to rely on more than one financial metric for making an investment decision.
It is important to note that while dividends reduce retained earnings (profit left after paying dividends), investors often view dividends positively because they represent tangible returns and the potential for passive income.
Take the Next Step:
Why Investors Care About EPS
Investors pay close attention to EPS because it gives them insight into a company's profitability and financial health. Here's why earnings per share matters:
- Profitability Indicator: EPS directly shows investors how profitable a company is relative to its share count. It serves as a comparable scorecard for profitability.
- Comparison Tool: Investors use EPS to compare companies within the same industry. A higher EPS can indicate a more profitable, efficient company.
- Investment Decisions: A steady or growing EPS signals a healthy and potentially lucrative investment, while declining EPS may signal maturing headwinds.
- Dividend Insights: EPS can also hint at the company's ability to sustain or increase dividends, providing income-focused investors with a critical measure for evaluation.
- Price to Earnings: The price-to-earnings ratio is a popular ratio to indicate how expensive a stock is trading relative to its earnings. The price is the current share price, while EPS is the earnings component.
You Might Also Like:
Example of EPS
Imagine you are a traditional retail investor evaluating whether to invest in two Artificial Intelligence (AI) companies: Company A or Company B.
Company A has a net income of $2 million with 500,000 shares outstanding, giving it an EPS of $4. Meanwhile, Company B earns $3 million but has 2 million shares outstanding, resulting in an EPS of $1.50.
Company B generates more overall absolute profit, but Company A appears more profitable per share. As a result, you might prefer Company A because it makes better use of shareholder capital, showing more efficiency and profitability per share.
Basic vs. Diluted EPS
When researching EPS, you'll likely see two standard terms: basic EPS and diluted EPS. Both measure profitability but calculate it in slightly different ways based on how they calculate outstanding shares. Here’s how they work:
- Basic EPS is calculated using the actual number of shares currently outstanding.
- Diluted EPS considers all potential shares that could become outstanding, including stock options, convertible bonds, or warrants. Diluted EPS provides a more conservative number because it assumes all potential shares are converted to actual shares, increasing the denominator and lowering the EPS.
For instance, if a company has stock options allowing employees to purchase 100,000 additional shares, the diluted EPS accounts for these potential shares, resulting in a lower EPS than the basic EPS.
Public companies (listed on the Nasdaq or NYSE) are required to report both basic and diluted EPS on the face of their income statement.[2] This requirement allows anyone from an institutional investor to financial media to quickly identify a company’s EPS performance.
Take the Next Step:
on Robinhood’s Website
Robinhood Investing
Smart Money Rating: 4.9/5
Intro Offer: Sign Up and Get 1 Free Stock
Account Minimum: $0
Annual Fee: $0
What Does a High EPS Mean?
A high EPS suggests the company is profitable and more attractive to investors. But there's more context to consider:
- Profitability: A consistently high EPS signals strong earnings, reflects positively on management, and shows a profitable business model.
- Attractiveness to Investors: Companies with higher EPS usually attract more investor interest, driving demand and potentially increasing stock price.
- Growth Potential: High EPS, significantly when growing over time, indicates a company is expanding, innovating, or effectively managing costs.
Evaluating EPS Performance
However, a high EPS alone isn't enough. Investors must also consider other metrics and factors, such as industry trends, macroeconomic conditions, and the company's debt and financial stability. Here are a few different variables to consider:
- Capital Efficiency: Investors like to focus on capital efficiency when comparing companies for an investment. While two companies may have equivalent EPS numbers, one may have much less cash or assets to generate revenue. The company yielding a high EPS with lower assets is considered the more efficient business.
- Dividends: Earnings are always in the crosshairs of investor analysis. While earnings are accumulated in retained earnings, they can also be paid out as dividends. Although a company has a high EPS, it may reinvest those earnings into growth initiatives, research and development, or product launches. It is important to note that investors can't count on accessing earnings because a company's board of directors must declare a dividend.
Additionally, you should evaluate EPS through the lens of time. For example, an unusually high EPS could simply be the result of short-term events like asset sales or dispositions, so investors should investigate further before making decisions.
Smart Summary
Earnings Per Share is a widely used financial ratio to evaluate a company’s profitability. In general, the higher the EPS, the better the company’s performance. EPS allows investors to compare multiple investments quickly. By understanding and analyzing EPS—both basic and diluted—you can make informed decisions that align with your financial goals. It should used as part of a broader analysis, including factors like company management, market conditions, net assets, and overall industry trends.
You Might Also Like:
Smart Money requires our expert writers to rely on trusted primary sources—academic research, government reports, expert interviews, original reporting, and peer-reviewed data—to deliver precise and up-to-date content. All of our content is thoroughly fact-checked. We also incorporate relevant research from reputable publishers when it aligns with our editorial focus. For a closer look at our rigorous journalistic standards, explore our editorial guidelines.
(1) U.S. News. Earnings Gainers (Q1 2025). Last Accessed March 26, 2025.
(2) Deloitte. Your guide to presentation and disclosure under ASC 260. Last Accessed March 26, 2025.
