Earnings Per Share

In one sentence: EPS says how much profit a company earned for each share of its stock, after the preferred shareholders have been paid their dividends.

$\text{EPS} = \frac{\text{Net income} - \text{Preferred dividends}}{\text{Weighted average shares outstanding}}$

Read it out loud: “E P S equals net income minus preferred dividends, divided by the weighted average number of shares outstanding. EPS is earnings per share, the profit for each share, measured in dollars per share.”

Before you start

The ideas and signs this page uses, explained from zero. For powers of ten, Greek letters and other notation in general, see Math basics.

Net income: Net income is a company’s profit after every cost has been paid for the year, including wages, rent, interest and taxes. It sits at the bottom of the company’s income statement, which is why it is often called the bottom line. It is measured in dollars for a whole year, so 500000 dollars of net income means the company kept that much after all its costs.
Shares and shareholders: A share is one equal part of the ownership of a company. A shareholder owns some of those shares. A company with 900000 shares has 900000 equal parts of ownership, so a person who owns 9000 of them owns one hundredth of the company, which is 1%.
Common and preferred shares, and dividends: A dividend is a payment of money from a company to its shareholders, usually from profit. Common shares are the ordinary shares of a company. Preferred shares usually promise a fixed dividend, and that dividend is paid before any dividend is paid on the common shares. The preferred dividends for the year are therefore taken out of the profit first.
Weighted average: A weighted average is an average in which each value counts for as long as it lasts. Each share count is multiplied by the fraction of the year it was held, and then the results are added together. The weighting matters when the periods have different lengths, or when the number of shares changes during the year.

What each symbol means

Symbol	Meaning
$\text{EPS}$	Earnings per share, the profit available for each share of common stock, measured in dollars per share. An EPS of 0.50 dollars per share means each share earned 50 cents of profit for the year. It is the answer the formula gives.
$\text{Net income}$	Net income, the profit left after all costs, interest and taxes for the year have been taken out, measured in dollars. It is the profit that belongs to the company’s owners before anything is shared out.
$\text{Preferred dividends}$	Preferred dividends, the payments due to preferred shareholders for the year, measured in dollars. Preferred shareholders are paid before common shareholders, so these payments are taken out of the profit before the rest is shared out.
$\text{Weighted average shares outstanding}$	Weighted average shares outstanding, the average number of common shares held by owners during the year, measured in shares. It is an average because the number changes when shares are issued or bought back during the year.

The formula piece by piece

$\text{Net income} - \text{Preferred dividends}$: Start with the profit of the whole company for the year. Subtracting the preferred dividends removes the part already promised to the preferred shareholders. What is left is the profit that belongs to the common shares, the amount that can be measured per share.
$\text{Weighted average shares outstanding}$: Next, the number to divide by. Shares can be issued or bought back during the year, so the weighted average gives one number that reflects how many shares were in place for each part of the year. Using a single count from the start or the end would miss those changes.
$\text{EPS} = \frac{\text{Net income} - \text{Preferred dividends}}{\text{Weighted average shares outstanding}}$: The whole formula in one sentence: earnings per share equals the net income minus the preferred dividends, divided by the weighted average number of shares outstanding.

What the formula is doing, and why

A company’s net income is one large amount for the whole company. Owners hold shares, and they want to know how much profit sits behind each share. The formula takes the profit that belongs to the common shareholders and splits it into equal parts, one for each share. That is why EPS is measured in dollars per share.

Why subtract the preferred dividends? Preferred shareholders are paid their fixed dividend before the common shareholders get anything. That money is not available to the common shares, so it is removed from net income first. Subtracting it leaves the profit that is really left for the common shares.

Why divide by the number of shares? A bigger profit only means more earnings for each share if the number of shares stays the same. Dividing by the share count gives the profit per share. If a company doubled its shares and kept the same profit, each share would earn half as much, which is why the share count sits in the bottom of the fraction.

Why a weighted average? Share counts change during the year when new shares are issued or old shares are bought back. Using the count at the start or the end alone would miss those changes. The weighted average counts each number of shares for the part of the year it was in place, so the divisor matches the profit that was earned over the whole year.

EPS is an accounting figure taken from a company’s financial reports. It measures the profit of the past year for each share, and it is one of several measures of profit. It is not the price of a share, and it does not promise what a share will be worth later.

An everyday picture

Think of a pizza shared among friends. The whole pizza is the net income. First, one friend takes a fixed portion that was promised in advance, which is the preferred dividend. The rest of the pizza is cut into equal slices, one for each share. The more slices there are, the smaller each slice, so EPS is the pizza left after the fixed portion, divided by the number of slices.

Worked example: EPS for a coffee chain that issued shares halfway through the year

Blue Kettle Coffee, a made-up coffee chain, earned a net income of 500000 dollars for its year. It paid 50000 dollars of dividends to its preferred shareholders. It had 800000 common shares for the first half of the year, then issued 200000 new shares, so it had 1000000 shares for the second half. We want the weighted average share count and then the EPS.

Find the profit that belongs to the common shareholders. Net income is the profit for the whole company, but the preferred shareholders are paid their 50000 dollars first. We subtract the preferred dividends from net income: $500000\ \text{dollars} - 50000\ \text{dollars} = 450000\ \text{dollars}$ . This 450000 dollars is what is left for the common shares.
Weight the share count for the first half of the year. The company had 800000 shares for half of the year, and half a year is the fraction 0.5. So we multiply: $800000 \times 0.5 = 400000$ share-years. A share-year is one share held for one full year, so a share held for half a year counts as half a share-year.
Weight the share count for the second half of the year. The company had 1000000 shares for the other half of the year, so $1000000 \times 0.5 = 500000$ share-years. Adding the two parts gives the weighted average: $400000 + 500000 = 900000$ shares. This is the single share count that reflects both halves of the year.
Divide the common profit by the weighted average shares. EPS is profit per share, so we divide 450000 dollars by 900000 shares: $\text{EPS} = \frac{450000\ \text{dollars}}{900000\ \text{shares}} = 0.5\ \text{dollars per share}$ . Dollars divided by shares gives dollars per share, which is the unit of EPS.
Check the answer by multiplying back. If each of the 900000 weighted shares earned 0.5 dollars, the total is $900000 \times 0.5 = 450000$ dollars, the same profit for the common shares that we started with. Running the division in reverse brings back the starting number, so the answer is right.
See what the share issue did to EPS. If the company had not issued the new shares, its 800000 shares would give an EPS of $\frac{450000}{800000} = 0.5625$ dollars per share. The new shares lowered EPS from 0.5625 dollars to 0.50 dollars, because the same profit is now spread over more shares.

Answer: Blue Kettle Coffee earned 0.50 dollars per share on its common shares. The weighted average of 900000 shares lies between the 800000 shares of the first half and the 1000000 shares of the second half, so it counts the new shares only for the part of the year after they were issued.

The numbers in this example are recomputed by script every time the site is built.

Common mistakes

Subtracting the preferred dividends from the share count, or forgetting to subtract them at all. Preferred dividends are money, so they come off the profit before the division.
Using the year-end share count instead of the weighted average. When shares are issued during the year, the year-end count is too big for the whole year, and EPS comes out too small. In the example, 450000 dollars divided by 1000000 shares gives 0.45 dollars, which is wrong for the year.
Dividing by the number of shareholders instead of the number of shares. One shareholder can own many shares, so the count of people is not the count of parts.
Treating EPS as the money paid to each shareholder. EPS is the profit earned per share, and only part of that profit may be paid out as dividends.

Where you will meet it

Company annual reports, where EPS is shown beside the net income for the year.
Comparing the profit of two companies of different sizes, because EPS puts each one on a per-share basis.
The price-to-earnings ratio, which divides the share price by EPS.
Diluted EPS, a version that also counts shares that could be created from options or convertible securities.

Questions people ask

Why is EPS not the same as the dividend per share?

EPS is the profit earned per share. The dividend per share is the part of that profit that is actually paid out to shareholders. Blue Kettle Coffee, in the price-to-earnings example, earns 0.50 dollars per share and pays 0.30 dollars of it as dividends, keeping the rest for the business.

Why does EPS fall when a company issues new shares?

The same profit is now divided among more shares. Unless the new shares bring extra profit, EPS falls. The example on this page shows EPS would be 0.5625 dollars without the new shares, and 0.50 dollars with them.

Can EPS be negative?

Yes. If the company made a loss, net income is negative, so EPS is negative too. That means each share lost money for the year.

Price-to-Earnings Ratio: The P/E ratio says how many dollars investors pay today for each dollar of a company’s yearly earnings per share.
Return on Equity (ROE): Return on equity tells you how many cents of yearly profit a business earns for each dollar its owners have in it.
Dividend Yield: Dividend yield says how much cash a company pays out each year, as a percentage of the price you would pay for one share.