Formula
EPS = (Net Income − Preferred Dividends) ÷ Weighted Average Shares Outstanding
The Short Version
EPS measures how much profit a company generates for each individual share of stock. It's the building block for the P/E ratio and one of the most-watched numbers when a company reports quarterly earnings.
Explain It Like I'm 10
Imagine a family bakery made $1,000 profit this year, and the family split ownership into 100 equal paper 'shares' among relatives. To find out how much profit each single share earned, you just divide: $1,000 ÷ 100 shares = $10 of profit 'per share.' That's exactly what EPS means for a company — it just takes the total profit and divides it evenly across every share that exists.
Step-by-Step Example
- 1 Company profit (net income) for the year: $50,000,000.
- 2 Total shares outstanding: 10,000,000.
- 3 Divide: $50,000,000 ÷ 10,000,000 = $5.00 EPS.
- 4 This means each single share 'earned' $5 of profit this year.
- 5 If the company issues 2,000,000 MORE shares next year without earning any more profit, EPS would shrink to $50,000,000 ÷ 12,000,000 ≈ $4.17 — same profit, but split more ways, so each share looks less valuable. This is called 'dilution.'
Textbook Example
A company with $50 million in net income and 10 million shares outstanding has an EPS of $5.
Quick Recap
- ✓ 'Trailing EPS' uses the last 12 months of actual earnings.
- ✓ 'Forward EPS' uses analysts' estimated earnings for the next 12 months.
- ✓ 'Diluted EPS' accounts for stock options/convertible securities that could increase share count — it's usually lower than basic EPS and considered more conservative.