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Earnings per Share (EPS)

Definition

The financial ratio earnings per share, or EPS, is perhaps the single most popular variable used by analysts and investors to evaluate the profitability of a company. EPS measures the profitability of a company on a per share basis.

Calculation

Earnings per Share = (Net Income – Preferred Dividends) / Shares Outstanding

Explanation

A profitability ratio, earnings per share provides the investor with a measure of the profits of a company, as generated for each share of common stock outstanding. Since the number of shares outstanding can change over time, the metric typically uses a weighted average value.

There are several variations on the earnings per share calculation, including:

  • Diluted EPS: which uses the outstanding shares plus convertibles or warrants outstanding
  • Trailing EPS: which uses last year’s earnings and common shares (the actual EPS reported in financial statements)
  • Current EPS: which uses the current year’s projected earnings
  • Forward EPS: which is typically based on analysts’ projections for a future year

Example

Company A’s income statement indicated net income of $4,283,000, and no payment of preferred dividends. The weighted average number of common shares outstanding for this same time period was 706,766. The trailing EPS for Company A would be:

= ($4,283,000 – $0) / 706,766, or $6.06 per share

Related Terms

net income, retained earnings, fully diluted earnings per share, statement of retained earnings, diluted earnings per share