Earnings Per Share (EPS)

Key takeaways
* EPS measures the profit attributable to each share of common stock: higher EPS generally indicates greater profitability.
* Basic EPS = (Net Income − Preferred Dividends) ÷ Weighted Average Common Shares Outstanding.
* Diluted EPS accounts for all potentially dilutive securities (options, convertible debt, warrants).
* Adjusted EPS and EPS from continuing operations remove one-time items to better reflect ongoing performance.
* EPS is most useful when compared over time, across peers, or combined with valuation metrics such as the P/E ratio.

What is EPS?

Earnings per share (EPS) is a widely used profitability metric that shows how much net income is allocated to each outstanding share of common stock. Investors use EPS to evaluate a company’s profitability on a per-share basis and as the “E” in the price-to-earnings (P/E) ratio.

Basic EPS: formula and calculation

Basic EPS is calculated as:

EPS = (Net Income − Preferred Dividends) ÷ Weighted Average Common Shares Outstanding

Notes on calculation:
* Use the weighted average number of common shares during the reporting period (not just the period-end number), because share counts can change with issuances, buybacks, splits, or dividends.
* Adjust for stock splits and stock dividends so results are comparable across periods.
* Preferred dividends are subtracted because EPS reflects earnings available to common shareholders.

Diluted EPS

Diluted EPS incorporates the effect of securities that could increase the share count if converted or exercised (stock options, convertible debt, warrants, restricted stock units). It will always be equal to or lower than basic EPS.

Key points:
* Include incremental shares from potential convertibles in the denominator.
* If convertible debt is added to the denominator, add back the avoided interest (net of tax) to the numerator to avoid understating earnings.
* Diluted EPS reflects potential dilution and gives a more conservative view of per-share earnings.

Adjusted EPS and EPS from continuing operations

Analysts often present adjusted EPS to remove nonrecurring or unusual items (one-time gains/losses, asset sales, restructuring charges) so results better reflect ongoing operations.

Adjusted EPS formula (conceptual):
Adjusted EPS = (Net Income − Preferred Dividends ± Nonrecurring Items) ÷ Weighted Average Common Shares Outstanding

EPS from continuing operations excludes discontinued businesses or operations the company will not carry forward. This helps compare performance across periods when a company has made major structural changes.

Rolling EPS and trailing EPS

• Trailing EPS typically refers to the sum of EPS over the past four quarters (TTM — trailing twelve months).
• Rolling EPS blends historical and forecasted figures, e.g., combining EPS from the past two quarters with estimated EPS for the next two quarters to produce an annualized expectation.

Rolling EPS (example formula):
Rolling EPS = (Net income from previous two quarters + expected net income for next two quarters − preferred dividends) ÷ Average shares outstanding

How investors use EPS

• Valuation: EPS is used to compute the P/E ratio (Share Price ÷ EPS), indicating how much investors pay per dollar of earnings.
• Performance tracking: Compare EPS over time or against peers to assess profitability trends and relative performance.
• Dividend context: EPS shows earnings available per share, but dividends are determined by the board — a company can retain earnings instead of paying them out.

EPS and capital efficiency

EPS alone doesn’t reflect how much capital was required to generate earnings. Two companies with the same EPS may differ in efficiency. Metrics such as Return on Equity (ROE) combine earnings and equity to measure capital efficiency.

What is a “good” EPS?

There’s no absolute EPS threshold. Evaluate EPS growth and levels relative to:
* Historical performance for the company
* Peers in the same industry
* Market expectations and analyst forecasts

A company can report rising EPS and still see its stock fall if results miss expectations. Conversely, declining EPS might be tolerated if expectations were worse.

Limitations and potential distortions

• Share buybacks reduce shares outstanding and can artificially boost EPS without increasing net income.
• Changes in accounting policy can swing EPS independently of operating performance.
• One-time gains or losses can distort comparability — hence the need for adjusted EPS.
• EPS does not account for share price; it must be combined with valuation multiples (P/E) to judge attractiveness.

Quick Excel calculation

Place values in adjacent cells:
* B3 = Net income
* B4 = Preferred dividends
* B5 = Weighted average common shares outstanding

Formulas:
* B6: =B3 – B4 (earnings available to common)
* B7: =B6 / B5 (EPS)

Conclusion

EPS is a fundamental per-share profitability metric and a core input to valuation ratios like P/E. It is most informative when viewed alongside diluted EPS, adjusted measures that exclude one-offs, capital-efficiency metrics such as ROE, and comparisons to peers or historical trends. Be aware of factors that can distort EPS (buybacks, accounting changes, one-time events) and use EPS as one tool among many in investment analysis.