EPS tells you how much profit a company earns for each share of its stock.

🔹 Formula:

EPS = (Net Income – Preferred Dividends) / Average Outstanding Shares

  • Net Income = company’s profit after all expenses, taxes, and interest.

  • Preferred Dividends = dividends owed to preferred shareholders (if any).

  • Outstanding Shares = total shares held by common shareholders.

🔹 Example:

Net Income = $10 million

Preferred Dividends = $1 million

Shares Outstanding = 4.5 million

EPS = (10 - 1) / 4.5 = 2.0 per share

👉 This means each share represents $2 of profit.

🔹 Why EPS Matters

It’s a key measure of profitability per share.

Investors use it to compare companies of different sizes.

Forms the basis for P/E ratio (Price-to-Earnings), a common valuation metric.

⚠️ Important: A higher EPS doesn’t always mean a better company—it must be compared to competitors, industry averages, and growth trends.

📌 1. Basic EPS

This is the straightforward calculation we already covered:

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

Uses only the shares that already exist in the market.

Simple, but doesn’t consider the possibility of more shares being created in the future.

📌 2. Diluted EPS

This adjusts EPS downward to account for potential new shares that could be created if certain securities are exercised:

Stock options (employees converting options into shares)

Convertible bonds (bonds that can turn into shares)

Convertible preferred stock

Diluted EPS = (Net Income – Preferred Dividends) / (Weighted Average Shares Outstanding + All Potential Dilutive Shares)

👉 This usually results in a lower EPS than basic EPS, because profits are “spread out” across more shares.

📊 Example:

Net Income = $10 million

Preferred Dividends = $1 million

Common Shares = 5 million

Potential extra shares from stock options = 1 million

Basic EPS:

(10 - 1) / 5 = 1.8

Diluted EPS:

(10 - 1) / (5 + 1) = 1.5

📌 Why Both Matter

Basic EPS = shows current profitability per share.

Diluted EPS = more conservative, shows what happens if all potential shares get issued (important for investors worried about dilution).

👉 Analysts usually focus on diluted EPS, since it reflects the “worst-case” for shareholders.