Earnings Per Share (EPS)
EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding
Earnings per share represents the portion of a company's profit allocated to each outstanding share of common stock. It's one of the most widely used metrics for valuing stocks and comparing profitability.
Variables
Profit after all expenses
Dividends paid to preferred shareholders
Average shares outstanding during the period
Example Calculation
Scenario
Company VWX has net income of $5,000,000, preferred dividends of $200,000, and 1,000,000 weighted average common shares.
Given Data
Calculation
EPS = ($5,000,000 - $200,000) / 1,000,000
Result
$4.80
Interpretation
Each common share earned $4.80 in profit. Investors can multiply this by their shares owned to estimate their portion of earnings.
When to Use This Formula
- ✓Stock valuation and comparison
- ✓Calculating P/E ratios
- ✓Tracking profitability over time
- ✓Comparing companies of different sizes
Common Mistakes
- ✗Forgetting to subtract preferred dividends
- ✗Not using weighted average shares
- ✗Ignoring diluted EPS from options and convertibles
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Common questions about this formula
Basic EPS uses actual shares outstanding, while diluted EPS includes potential shares from stock options, convertible bonds, and other dilutive securities. Diluted EPS is usually lower and represents a worst-case scenario.
Preferred dividends are subtracted because EPS represents earnings available to common shareholders. Preferred shareholders have a prior claim on earnings, so their dividends must be paid first.