Earnings per share (EPS) is one of the most widely used metrics in stock analysis. It measures the portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability and is a key input in other valuation metrics such as the price-to-earnings (P/E) ratio. Investors frequently compare EPS across quarters and years to assess whether a company's profitability is growing.

Basic EPS is calculated by subtracting preferred dividends from net income, then dividing by the weighted average number of common shares outstanding. Preferred dividends are subtracted because EPS measures earnings available to common shareholders specifically, and preferred shareholders receive their dividends before any earnings flow to common stockholders.

The weighted average shares outstanding accounts for changes in the number of shares during the reporting period due to stock issuances, buybacks, or other corporate actions. This provides a more accurate representation than simply using the share count at the end of the period. A higher EPS generally indicates greater profitability, but investors should compare EPS relative to the stock price and industry peers for meaningful analysis.

Formula

Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding

Example

A company reports $1,000,000 in net income and pays $50,000 in preferred dividends. With 500,000 weighted average common shares outstanding, the basic EPS is ($1,000,000 - $50,000) / 500,000 = $1.90 per share.