Earnings Per Share (EPS)

Total profit alone does not tell a shareholder much, because companies have very different numbers of shares. EPS puts profit on a per-share basis, making it easier to track over time and to compare with the share price.

For example, a company with net income of 10 million and 5 million shares outstanding has EPS of 2. If it has preferred shares, any dividends owed to preferred shareholders are subtracted from net income first, because that profit does not belong to ordinary shareholders.

Companies usually report two versions. Basic EPS uses the average number of shares outstanding during the period. Diluted EPS also counts shares that could be created from items such as stock options and convertible bonds, giving a more cautious figure.

EPS is central to valuation. The price-to-earnings ratio divides the share price by EPS. Investors watch EPS growth closely, but EPS can also rise when a company buys back its own shares, reducing the share count, even if total profit does not grow.