Earnings per share, or EPS, measures the performance of a publicly listed company. EPS is simply the company’s total dollar earnings for a given period, divided by the number of shares outstanding. Earnings are synonymous with profit and net income. The terms can be used interchangeably, though net income is the formal accounting term typically used in company financial reports.
Earnings per share formula
The EPS formula is simple:
Net income for period (i.e., quarter) / Number of shares outstanding
Earnings per share answers the question: What’s in it for me if Company X reported $XXX million in earnings and I own one share? It makes earnings personal.
So, for example, if Company X reported $100 million in net income for the quarter and it has 50 million shares outstanding, earnings per share (EPS) are:
$100,000,000 / 50,000,000 = $2 per share
EPS applied to common shareholders
Two kinds of shares are sold by companies:
- Common shares. Sometimes called ordinary shares, these only have a claim on earnings after the company has paid all obligations. Owners are the only ones who can vote at the company’s annual shareholders’ meeting.
- Preferred shares. These don’t offer voting rights but a prior claim on earnings through payment of dividends. The preferred dividends are an obligation—the company must subtract them from net income before calculating what is attributable to common shareholders.
The formula for earnings per share for preferred shares is thus modified:
Net income for period - preferred stock dividends / Number of shares outstanding
Earnings per share example
Let’s use a real example of how EPS looks when preferred dividends are involved.
JPMorgan Chase & Co. reported net income of $14.30 billion for the first quarter of 2021. Net income attributed to common shareholders was $13.85 billion—meaning the company made about $450 million in preferred stock dividend payments before calculating EPS. Its calculation for basic EPS was:
$13.85 billion / 3.074 billion weighted average shares outstanding = $4.51 per share
Without the preferred dividend obligations, JPMorgan’s earnings per share would have been about $4.65.
Basic vs. diluted EPS
A distinction needs to be made between basic and diluted EPS. Diluted EPS, unlike the formula for basic EPS, accounts for all potential shares outstanding.
Companies that have granted options to executives to buy shares at future dates, or that have sold bonds with provisions allowing holders to convert their debt holdings to shares, must calculate diluted EPS. This assumes all stock options outstanding have been exercised and any convertible debt has been exchanged for shares. The result is to increase the theoretical number of shares outstanding and spread out, or dilute, how much net income flows to each share.
Most investors rely on diluted EPS because it’s more conservative, taking into account all contingencies that could affect a company’s per-share calculations. In JPMorgan’s case, it was a minor difference. Diluted EPS was $4.50, only a penny less than basic EPS because the company had only about 5 million more shares outstanding when taking into account stock options and convertible debt.
Some companies will have more earnings dilution than others, depending on their use of stock options and convertible debt. In newer industries, such as biotechnology, companies are more likely to offer stock options as a substantial part of compensation in lieu of cash salary until the companies establish sales growth and become profitable.
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