Earnings Per Share (EPS) represents the amount of net income attributable to each share of a company’s common stock. It shows how much profit is earned for every share outstanding, providing a standardized metric of profitability.
Why is EPS Important?
EPS is important because it:
Reflects Shareholder Value: Indicates how much profit shareholders receive per share, guiding investment decisions.
Influences Stock Price: Often used by investors and analysts to assess company performance and valuation multiples (e.g., Price-to-Earnings ratio).
Tracks Profitability Trends: Comparing EPS over time reveals changes in profitability and management effectiveness.
How is EPS Calculated?
EPS is calculated by dividing Net Income, less any preferred dividends, by the weighted average number of common shares outstanding during the period:
Basic EPS = (Net Income − Preferred Dividends) ÷ Weighted Average Shares Outstanding
For diluted EPS, potential shares from options, warrants, and convertible securities are included:
Diluted EPS = (Net Income − Preferred Dividends) ÷ (Weighted Average Shares Outstanding + Dilutive Potential Shares)
Additional Considerations
Basic vs. Diluted EPS: Diluted EPS accounts for all possible shares, showing a conservative earnings measure.
Impact of Share Issuance or Buybacks: Changes in share count affect EPS—share repurchases can boost EPS, while new issuances may dilute it.
One-Time Items: Non-recurring gains or losses can distort EPS; analysts often adjust to derive normalized EPS for clearer trend analysis.