How to calculate EPS (earnings per share)
Earnings per share (EPS) is one of the most widely used financial metrics in investing. It helps investors understand how profitable a company is on a per-share basis and plays a key role in stock valuation and earnings analysis.
EPS shows how much profit a company earns per share of common stock, making it easier to compare performance across companies.
The EPS calculation depends on accurate net income and weighted average shares outstanding, not just total shares at year-end.
EPS should generally be used alongside other metrics, such as cash flow and revenue growth, for a complete picture of financial health.
What is EPS (earnings per share)?
Earnings per share (EPS) measures how much profit a company generates per outstanding share of common stock. It represents the portion of a company’s earnings allocated to each share owned by investors.
What EPS tells investors
EPS helps investors understand:
Profitability on a per-share basis
How a company’s performance changes over time
How one company compares to others in the same industry
Because EPS standardizes earnings across share counts, it’s often especially useful for comparisons.
Where EPS is found
EPS is commonly reported on:
Income statements
Quarterly and annual earnings reports
Financial news websites and stock screeners
Most public companies report both basic and diluted EPS.
The EPS formula explained
Basic EPS formula
The standard EPS formula is:
EPS = (Net income − preferred dividends) ÷ weighted average shares outstanding
Why preferred dividends are subtracted
EPS measures earnings available to common shareholders. Since preferred shareholders have priority claims on dividends, their dividends are subtracted before calculating earnings attributable to common stock.
Why weighted average shares are used
Companies rarely have the same number of shares outstanding all year. The weighted average accounts for changes caused by:
Stock issuance
Share buybacks
Stock splits
Using a weighted average can prevent EPS from being distorted by timing differences.
Step-by-step: How to calculate EPS
Step 1: Find net income
Locate net income on the income statement. This figure generally appears at the bottom and reflects earnings after taxes and expenses.
Step 2: Subtract preferred dividends (if any)
If the company has preferred stock, subtract preferred dividends. Many companies do not issue preferred stock, in which case this step equals zero.
Step 3: Determine weighted average shares outstanding
Use the weighted average number of shares outstanding over the reporting period, not just the ending share count.
Step 4: Divide to get EPS
Divide earnings available to common shareholders by the weighted average shares to calculate EPS.
EPS calculation example
Simple EPS example
Let’s use the following company information as an example:
Net income: $10 million
Preferred dividends: $1 million
Weighted average shares outstanding: 5 million
Calculation:
($10 million − $1 million) ÷ 5 million = $1.80 EPS
What the result means
An EPS of $1.80 means the company earned $1.80 in profit for each outstanding share of common stock during the period.
Basic EPS vs. diluted EPS
What is basic EPS?
Basic EPS uses only the shares of common stock currently outstanding.
What is diluted EPS?
Diluted EPS includes the impact of potential additional shares issued in the form of:
Stock options
Warrants
Convertible bonds or preferred stock
Why diluted EPS matters
Diluted EPS reflects the potential impact on earnings per share if all convertible securities were exercised.
Where to find EPS on financial statements
Income statement presentation
Public companies typically report:
Basic EPS
Diluted EPS
These figures usually appear near the bottom of the income statement.
Quarterly vs. annual EPS
EPS can be reported as:
Quarterly EPS: performance for a single quarter
Trailing twelve months (TTM) EPS: combined results from the last four quarters
TTM EPS is often used for valuation ratios.
Why EPS is important to investors
Company profitability
Consistent EPS growth can reflect improving profitability, though it should be evaluated alongside other financial indicators.
Stock valuation
EPS is commonly used in valuation metrics such as the price-to-earnings (P/E) ratio, which compares stock price to earnings.
Earnings comparisons
EPS allows investors to compare companies of different sizes and track performance over time.
Limitations of EPS
EPS can be manipulated
EPS can increase without real business improvement through:
Share buybacks that reduce share count
Accounting changes that affect reported earnings
EPS doesn’t show cash flow
EPS is based on accounting profit, not actual cash generated by the business.
Industry comparisons can be misleading
Capital-intensive industries often have different EPS profiles than asset-light businesses, making cross-industry comparisons less meaningful.
EPS vs. other profitability metrics
EPS vs. net income
Net income shows total profit while EPS shows profit per share.
EPS vs. free cash flow per share
Free cash flow per share focuses on actual cash generation rather than accounting earnings.
EPS vs. EBITDA
EPS is more shareholder focused. Earnings before interest, taxes, depreciation, and amortization (EBITDA) focuses more on a company’s profitability from its daily operations.
Common mistakes when calculating or using EPS
Forgetting preferred dividends
This may overstate earnings available to common shareholders.
Using the wrong share count
Using end-of-period shares instead of weighted average shares may distort EPS.
Relying on EPS alone
EPS should not replace broader financial analysis.
Bottom line
EPS is a foundational metric for evaluating company profitability and stock valuation, but it often works best when used in context. Understanding how EPS is calculated along with its limitations helps investors make more informed decisions.
It’s also important to keep in mind that investments can go down as well as up in value. Past performance and earnings growth do not guarantee future results.
For those new to investing, it can be helpful to read up on educational resources to create a solid foundation. Explore Raisin’s investing guides to get started.
Frequently asked questions
Divide earnings available to common shareholders by the weighted average number of shares outstanding.
There’s no universal “good” EPS — it depends on the company, industry, and growth trends.
A higher EPS may indicate stronger profitability, but context matters. Investors often consider growth trends, industry conditions, and overall financial health.
Reporting both can show current earnings per share and potential dilution risk for shareholders.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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