Earnings Per Share

Earnings Per Share (EPS) is a financial metric that indicates the portion of a company’s profit attributed to each outstanding Share of common Stock. It is calculated by dividing the net earnings available to Shareholder/">Shareholders by the number of Shares/">Outstanding Shares. EPS is often used by investors to gauge a company’s profitability and financial health.

Formula:

EPS = (Net Income – Dividends on Preferred Stock) / Average Shares/">Outstanding Shares

Examples:

  • If a company has a Net Income of $1 million, pays $100,000 in preferred dividends, and has 900,000 Shares outstanding, the EPS would be:
  • EPS = ($1,000,000 – $100,000) / 900,000 = $1.00
  • In another case, if a company reports a Net Income of $500,000, has no preferred dividends, and has 500,000 Shares outstanding, the EPS would be:
  • EPS = $500,000 / 500,000 = $1.00

Cases:

  • In a company with increasing Net Income, EPS tends to rise, which is generally a positive sign for investors.
  • A negative EPS indicates that a company is losing Money, which can be a warning sign for potential investors.
  • Companies may also report diluted EPS, which accounts for potential Shares that could be created through convertible Securities, Options, or warrants.