What Is Earnings Per Share (EPS)?

Earnings per share (EPS) is a company’s net profit for a period divided by the average number of common shares outstanding during that period. It answers a simple question: how much of the company’s profit belongs to each share?

Public companies report EPS at the bottom of the income statement every quarter and every year, and it is the headline number in most earnings reports.

How it’s calculated

Basic EPS = (net income - preferred dividends) / weighted average common shares

Preferred dividends come out first because that money goes to preferred shareholders, not common ones. See common vs preferred shares.

Maple Widgets Inc. (a hypothetical company) reports for the year:

Net income: $120 million
Preferred dividends: $10 million
Weighted average common shares: 50 million

Basic EPS = ($120M - $10M) / 50M = $2.20

Basic vs diluted EPS

Diluted EPS assumes that stock options, convertible bonds, and similar instruments are turned into shares, because that would spread the profit across more owners. If Maple Widgets had 5 million shares’ worth of options that could be exercised, diluted EPS would be $110M / 55M = $2.00. Diluted EPS is the more conservative figure, and it is the one usually compared with analyst estimates.

GAAP vs adjusted EPS

The EPS in the official financial statements follows accounting rules (US GAAP for most US companies, IFRS for most Canadian ones). Many companies also publish an adjusted or “non-GAAP” EPS that leaves out items they consider one-off, such as restructuring costs. Adjusted figures can be useful, but the company chooses what to exclude. Look at both, and read the reconciliation that explains the difference.

What EPS can hide

Buybacks raise EPS without raising profit. Fewer shares means a smaller denominator. A company with flat profit can report rising EPS. See stock splits and buybacks.
Profit is not cash. EPS comes from accrual accounting, so a company can report earnings while cash drains away.
One number says nothing about price. EPS becomes useful for valuation when compared with the share price, which is what the price-to-earnings ratio does.