Earnings Per Share (EPS)
Print| Net Earnings for Common Shareholders | $0.00 |
When assessing a publicly traded company’s profitability, headline net income alone does not indicate how much value is created for each individual stockholder. To standardize corporate earnings across companies of varying sizes, Wall Street relies on Earnings Per Share (EPS) as the primary metric for valuation ratios like the Price-to-Earnings (P/E) ratio.
Our free Earnings per Share Calculator computes both Basic EPS and Diluted EPS by subtracting preferred stock dividends and accounting for weighted average share counts and stock option dilution.
How to Calculate Basic & Diluted Earnings Per Share
EPS measures the portion of a firm’s net profit allocated to each outstanding share of common stock.
Basic Earnings Per Share Formula:
Basic EPS = ( Net Income - Preferred Dividends ) / Weighted Average Common Shares
Diluted Earnings Per Share Formula:
Diluted EPS = ( Net Income - Preferred Dividends + Net Dilutive Interest ) / ( Weighted Common Shares + Potentially Dilutive Securities )
Step-by-Step Corporate EPS Example
Imagine a publicly traded company reports the following annual financial results:
- Net Income: $12,000,000
- Preferred Stock Dividends Paid: $2,000,000
- Weighted Average Common Shares Outstanding: 5,000,000 shares
- Stock Options & Convertible Securities (Dilutive Shares): 1,000,000 additional shares
Let’s calculate Basic EPS and Diluted EPS step-by-step:
Net Income to Common = $12,000,000 - $2,000,000 = $10,000,000
Basic EPS = $10,000,000 / 5,000,000 shares = $2.00 per share
Diluted Share Count = 5,000,000 + 1,000,000 = 6,000,000 shares
Diluted EPS = $10,000,000 / 6,000,000 shares = $1.67 per share
| EPS Calculation Stage | Financial Inputs | Share Count Base | EPS Result |
|---|---|---|---|
| Net Common Income | $12M Net – $2M Preferred | — | $10,000,000 Pool |
| Basic EPS | $10,000,000 Income | 5,000,000 Shares | $2.00 / share |
| Diluted EPS | $10,000,000 Income | 6,000,000 Shares | $1.67 / share |
Frequently Asked Questions (FAQ)
What is the difference between Basic EPS and Diluted EPS?
Basic EPS only divides earnings by common shares currently outstanding. Diluted EPS includes all convertible securities, stock options, and warrants that could potentially convert into common shares, reflecting the worst-case earnings dilution for existing shareholders.
Why do stock buybacks increase Earnings Per Share?
When a corporation buys back its own stock, it reduces the total number of common shares outstanding (denominator). Assuming net income remains constant, dividing profits by fewer shares automatically increases EPS.
Why are preferred dividends subtracted when calculating EPS?
Preferred shareholders hold contractual priority claim on earnings. Preferred dividends must be paid in full before common stockholders receive any claims on earnings. Thus, preferred dividends are subtracted from net income to isolate earnings available exclusively to common shareholders.