What earnings per share tells you
Earnings per share spreads a company’s profit for a period across its common shares. Net income is the profit left after all expenses, interest and taxes. Preferred dividends are subtracted first because preferred shareholders are entitled to their dividend before common shareholders receive any, so that part of the profit does not belong to the common shares.
The share count is a weighted average because the number of shares can change during the year, for example when a company issues new shares or buys some back. Weighting each share by the part of the period it was outstanding matches the share count to the period in which the profit was earned. A result of 2.00 means the profit available to common shareholders came to 2.00 for each common share outstanding, on average, during the period.
All three inputs come from the company’s own financial reports. EPS is an accounting figure, not a market price. It becomes part of a valuation only when you set it against the share price.
Basic and diluted EPS
This calculator gives basic EPS. Listed companies generally report diluted EPS as well. Diluted EPS adds the shares that could be created if holders exercised options and warrants or converted convertible bonds and convertible preferred shares. Because the same profit is spread over more shares, diluted EPS is usually lower than basic EPS. A wide gap between the two shows how much each existing share’s claim on profit could shrink.
Reading a higher or lower result
- Rising EPS can come from higher profit, or from a smaller share count after the company buys back shares. Check which one is driving the change.
- Falling EPS can reflect lower profit, or new shares issued to raise money or pay for an acquisition.
- Negative EPS means a loss per share for the period.
Compare EPS for the same company over several periods rather than between companies. The level depends on how many shares a company has issued, so a lower EPS does not mean a company is less profitable. When a company splits its shares, EPS for earlier periods is normally restated on the new share count so the periods stay comparable.
What EPS does not show
- It says nothing about the price you pay for those earnings.
- Net income can include one-off gains and losses, such as the profit on selling part of the business, that will not repeat.
- It is not cash. A company can report positive EPS while its operating cash flow is weak.
- It ignores how much capital was needed to produce the profit.
Common mistakes
- Dividing by the number of shares at the year end instead of the weighted average for the period.
- Forgetting to subtract preferred dividends. For cumulative preferred shares, the dividend for the period is normally deducted even if it has not been declared.
- Using group net income that includes the share belonging to non-controlling interests. EPS is based on the profit attributable to the parent company’s shareholders.
- Comparing one company’s basic EPS with another company’s diluted EPS.
Related measures
The price-to-earnings ratio divides the share price by EPS, which shows how much investors pay for each unit of earnings. Return on equity relates net income to shareholders’ equity instead of to the number of shares, so it shows how much profit the owners’ capital produced. Net profit margin shows how much of each unit of revenue becomes net income. For other market-based measures, see the valuation ratios.