What Is EPS (Earnings Per Share)? In Plain Words

The definition, from Investor.gov

Investor.gov, the U.S. Securities and Exchange Commission’s investor site, defines the term in one sentence: “A public company’s net profit divided by the number of its common shares.” Net profit is the profit left after costs are taken away. Common shares are the shares counted in that sentence.

Investor.gov’s separate entry for the price-earnings (P/E) ratio explains how earnings per share are calculated in that entry: earnings per share are calculated by dividing the earnings for the past 12 months by the number of common shares outstanding. Shares outstanding means the shares counted as outstanding in the sum.

Note the difference in wording between the two Investor.gov entries, printed here unmerged. The “Earnings Per Share” entry says “net profit” divided by “the number of its common shares,” and it gives no time period. The P/E entry says “earnings for the past 12 months” divided by “the number of common shares outstanding.”

The definition, from FINRA — stated separately

FINRA defines EPS this way: “EPS is the measure of a company’s profitability per outstanding share of common stock.” FINRA says common stock shares represent equity ownership in a company. Equity ownership means owning a share of the company.

FINRA’s “Evaluating Stocks” page states the sum in simpler words, and this page does not merge it with the wording above. That page says EPS is: “Calculated by dividing a company’s total earnings by the number of shares.” That sentence does not say “common” and does not say “outstanding.” The fuller FINRA wording on its metrics page, covering basic EPS, preferred shares, and diluted EPS, is printed in its own sections below.

The formula for basic EPS

FINRA says you will often see two EPS measures at the bottom of an income statement — basic and diluted. An income statement is a company report that shows its sales, costs, and profit. FINRA says there are several distinct performance measures within a company’s income statement, each telling a different part of the story.

Basic EPS = a company’s net income ÷ the number of outstanding common shares

FINRA states it this way: “Basic EPS is computed by dividing a company’s net income by the number of outstanding common shares.”

Net income is explained by FINRA this way: net income is what remains when total expenses are subtracted from total sales, or revenue. Revenue is the total sales figure in that sentence. FINRA adds that if total expenses exceed revenue, this is called a net loss.

FINRA adds one timing detail for basic EPS: “If the company issued new shares or bought back any shares during the quarter, it would use the weighted-average number of common shares in the denominator.” The denominator is the bottom number in a division sum — here, the share count. Weighted-average means an average that takes account of the change in the share count during the quarter, in FINRA’s description above.

Worked example, from FINRA

Investor.gov’s “Earnings Per Share” entry gives no worked number example, and its P/E entry gives no worked number example for EPS. FINRA does. The example below is FINRA’s own, from its page “Financial Performance Metrics Every Investor Should Know.”

Put in plain steps, using FINRA’s numbers only: $100 million divided by 50 million equals $2. So the EPS in FINRA’s example is $2.

Preferred shares and preferred dividends, from FINRA

This part comes from FINRA only. The Investor.gov entries read in full for this page do not mention preferred shares or preferred dividends.

FINRA says a company might also issue preferred shares, a different class of stock that doesn’t typically confer voting rights but often yields higher dividends than common stock. A class of stock is a type of stock. Dividends are payments described by FINRA in that sentence as what preferred shares often yield at a higher level than common stock.

FINRA then states the rule for the EPS sum: “If preferred shares are issued, the amount paid in dividends on these shares is subtracted from net income before dividing by the number of outstanding shares of common stock in the EPS calculation.” The amount paid in dividends on preferred shares is the preferred dividends amount in that sentence.

So, in FINRA’s wording, the basic sum changes when preferred shares are issued: first subtract the preferred dividends from net income, then divide by the number of outstanding shares of common stock. FINRA gives no worked number example for this preferred-dividends step on the page read for this page.

Diluted EPS, from FINRA

This part also comes from FINRA only. The Investor.gov entries read in full for this page do not cover basic EPS or diluted EPS as separate measures, and they do not use the word diluted.

FINRA says: “Diluted EPS is calculated by dividing net income by the common shares outstanding plus the potential number of shares that would be outstanding if such instruments as preferred shares, convertible bonds, stock options and warrants were exercised.” Instruments, in that sentence, are the items FINRA lists: preferred shares, convertible bonds, stock options and warrants. Exercised, in that sentence, means those instruments were acted on so that the potential shares would be outstanding.

FINRA gives the result in general words: “For this reason, diluted EPS is typically lower than the basic EPS figure.” Note FINRA’s word “typically.” FINRA does not state it as a rule for every company.

What EPS is used to compare

FINRA’s “Evaluating Stocks” page says: “Calculated by dividing a company’s total earnings by the number of shares, a company’s earnings per share allows you to compare the financial results of companies of different sizes. EPS is one indication of a company’s current financial strength.”

FINRA’s metrics page adds a use over time: “Looking at a company’s EPS performance over time can help you determine how a company’s profits are trending.” Trending, in that sentence, means which way profits are moving over time.

EPS is also the share figure used in another ratio the sources describe. FINRA says a price to earnings ratio, or P/E ratio, is calculated by dividing the stock price by its EPS. Investor.gov states the same link in its P/E entry: the P/E ratio is calculated by dividing the current stock price by the current earnings per share. This page does not explain the P/E ratio in full; it notes only that both sources use EPS in that calculation.

What this page does not cover

No source read for this page states a number that counts as a “good” EPS, and no source states a cut-off number above or below which a stock is a buy or a sell. This page states no such rule, because the sources do not.

Investor.gov’s entries read in full for this page give no worked number example for EPS, no basic-versus-diluted split, and no preferred-dividends step. For those parts, this page rests on the FINRA pages above, because Investor.gov gives none. FINRA’s “Evaluating Stocks” page likewise gives no basic-versus-diluted split and no worked number example for EPS.

This page does not pick stocks, does not name any real company as an example, and does not say what any stock price or any EPS figure will do next.

Words to know

Earnings per share (EPS): A public company’s net profit divided by the number of its common shares, in Investor.gov’s wording. FINRA also describes it as the measure of a company’s profitability per outstanding share of common stock.

Net income / net profit: What remains when total expenses are subtracted from total sales, or revenue, in FINRA’s wording. FINRA says if total expenses exceed revenue, this is called a net loss.

Common shares outstanding: The outstanding common shares counted in the sum. FINRA says common stock shares represent equity ownership in a company, and its basic EPS sum divides by the number of outstanding common shares.

Basic EPS: In FINRA’s wording, EPS computed by dividing a company’s net income by the number of outstanding common shares. If the company issued new shares or bought back any shares during the quarter, it would use the weighted-average number of common shares.

Diluted EPS: In FINRA’s wording, EPS calculated by dividing net income by the common shares outstanding plus the potential number of shares that would be outstanding if such instruments as preferred shares, convertible bonds, stock options and warrants were exercised. FINRA says diluted EPS is typically lower than the basic EPS figure.

Preferred shares: In FINRA’s wording, a different class of stock that doesn’t typically confer voting rights but often yields higher dividends than common stock.

Preferred dividends: The amount paid in dividends on preferred shares. FINRA says, if preferred shares are issued, that amount is subtracted from net income before dividing by the number of outstanding shares of common stock in the EPS calculation.

Income statement: A company report that shows its sales, costs, and profit. FINRA says you will often see two EPS measures at the bottom of an income statement — basic and diluted.

This page is general information only. It is not financial advice.