Earnings Per Share (EPS): Calculation & Importance

Earnings per share is a measure that allocates a company's profit or loss on a per share basis. This figure is reported on the company's income statement at the end of each accounting period. For example, a firm might report EPS of 50 cents per share for the previous calendar quarter. Because EPS tells investors how profitable a company is on a per share basis, this metric has a major effect on the share price.

Earnings Per Share Formula

Earnings per share equals the after-tax profit or loss minus preferred stock dividends paid, divided by the number of common stock shares outstanding. Suppose a company's profit less preferred stock dividends comes to $3 million for the year. If there are 1.25 million common shares outstanding, divide $3 million by 1.25 million. The EPS is $2.40 per share.

Adjustments to EPS

It's not unusual for the number of outstanding shares to change during an accounting period. To compensate, use the weighted average number of shares. The weighted average equals the number of outstanding shares at the beginning of the accounting period plus the product of the change in the number of shares multiplied by the proportion of the accounting period they were outstanding. Another adjustment is to calculate diluted EPS. Companies often issue stock options, warrants or other securities that can be exchanged for common stock. To figure the number of shares for a fully diluted EPS calculation, add the number of potential shares to the actual shares outstanding.