Earnings per share (EPS)
Also known as: EPS
Earnings per share (EPS) is a company's profit available to common shareholders divided by its outstanding common shares. The formula is EPS = (net income − preferred dividends) ÷ outstanding common shares.
Earnings per share (EPS) measures how much of a company's profit is attributable to each share of common stock. The formula is EPS = (net income − preferred dividends) ÷ outstanding common shares. Preferred dividends are subtracted because preferred shareholders are paid first — EPS reflects only what belongs to common shareholders.
Suppose a company earns $10 million of net income, pays $1 million in preferred dividends, and has 3 million common shares outstanding. Its EPS is ($10 million − $1 million) ÷ 3 million = $3 per share. Companies also report diluted EPS, which recalculates the figure assuming convertible securities, options, and warrants are exercised, spreading earnings over more shares.
EPS is the foundation of several fundamental analysis ratios. The price-to-earnings (P/E) ratio equals market price ÷ EPS and shows how much investors pay for each dollar of earnings. The dividend payout ratio compares dividends paid to EPS, and rising EPS over time is a standard sign of a growing, profitable company.
The Series 7, Series 65, and Series 66 exams all test EPS as part of fundamental analysis. Expect to compute EPS from an income statement, remember to subtract preferred dividends, and plug the result into related ratios like P/E and dividend payout.
Key takeaways
- EPS = (net income − preferred dividends) ÷ outstanding common shares.
- Preferred dividends are subtracted because EPS measures earnings available to common shareholders only.
- Diluted EPS assumes convertible securities and options are exercised, lowering the figure.
- The P/E ratio is market price divided by EPS — a core valuation metric built on EPS.
- The Series 7, Series 65, and Series 66 exams test EPS calculations within fundamental analysis.