The earnings per share formula
Earnings per share is net income minus preferred dividends, divided by shares: earnings per share = (net income − preferred dividends) ÷ shares outstanding. Net income is the company’s profit for the year, after tax. Preferred dividends are the dividends paid to preferred shareholders first. Shares outstanding is the weighted-average number of shares. The answer is a dollar amount per share, not a multiple: $2.00 means two dollars of profit for each share. Try the numbers on the earnings per share calculator and it does the division for you.
Step 1: find the net income
Start with the company’s accounts. Net income is the profit for the year, after tax — the bottom line of the income statement. Here is the worked example: net income of $120,000. Use the profit for the same year as the share count, and use the profit after tax, not before it, because tax is a real cost that comes out before shareholders see a cent.
Step 2: find the preferred dividends
Start with the notes to the accounts. Preferred dividends are the dividends paid to preferred shareholders first — they come out before the common shareholders get anything. Here is the worked example: preferred dividends of $12,000. If the company has no preferred shares, the preferred dividends are zero and the whole profit belongs to the common shares.
Step 3: find the shares outstanding
Start with the annual report or the 10-K. Shares outstanding is the weighted-average number of shares over the year — the shares that were actually out, averaged across the months, not the number on one day. Here is the worked example: 54,000 shares. A share count that grows through the year — new shares issued, options exercised — drags the EPS down, because the same profit is split over more shares.
Step 4: divide and read the answer
Subtract the preferred dividends from the net income, then divide by the shares outstanding. Here is the worked example: ($120,000 − $12,000) ÷ 54,000 = $2.00. The arithmetic is $120,000 less $12,000, divided by 54,000, is $2.00, so each share earned $2.00 of profit. The answer is a dollar amount per share — write it as $2.00, not 2.00.
Three worked examples
Example one — the headline numbers. A company earns $120,000, pays $12,000 to preferred shareholders, and has 54,000 shares out. The earnings per share is ($120,000 − $12,000) ÷ 54,000 = $2.00. Each share earned $2.00 of profit.
Example two — how much profit for a 2.50 EPS? The same company wants a 2.50 EPS on 54,000 shares and $12,000 of preferred dividends. The net income needed is 2.50 × 54,000 + $12,000 = $147,000 — the profit the company must earn for each share to earn two dollars and fifty cents. The earnings per share calculator runs the reverses for you.
Example three — how few shares for a 2.50 EPS? The same company earns $120,000 and pays $12,000 to preferred shareholders, and you want a 2.50 EPS. The shares needed is ($120,000 − $12,000) ÷ 2.50 = 43,200 — the share count the company must reach for each share to earn two dollars and fifty cents on the profit it already has. Fewer shares, same profit, higher EPS — that is why buybacks lift the EPS without lifting the profit at all.
One reverse to check your answer
Work the numbers backwards. A company has 54,000 shares and pays $12,000 to preferred shareholders, and you want its EPS to reach 2.50. The smallest whole-dollar net income for the EPS to reach the target is $147,000. A dollar less, and the profit falls short of the $147,000 needed, so the EPS falls just short of the target. The earnings per share calculator runs the reverses for you.
Net income vs preferred dividends vs shares outstanding
Net income is what the company earned — it moves every quarter, when the accounts come out. Preferred dividends are what the preferred shareholders take first — fixed by the preferred share terms, they come out before the common shareholders see anything. Shares outstanding is how the profit is split — it moves when the company issues shares or buys them back. The EPS joins them: the profit left for the common shareholders, divided by the shares that share it. When profit rises and the share count stays put, the EPS rises; when the share count rises and profit stays put, it falls.
What a high EPS means
A high EPS means each share earned a lot of profit — the company is profitable per share. But the EPS alone says nothing about the price: a $2.00 EPS at a $20 share price is a different story from $2.00 at a $200 share price — the first is a P/E of ten, the second a P/E of one hundred — so compare EPS within one industry, not across them. A $2.00 EPS is the profit per share, and the share price decides what you pay for it.
What a low EPS means
A low EPS means each share earned little profit — the company is barely profitable per share, or it is splitting the profit over a great many shares. A negative EPS means the company lost money — a loss per share, not a bargain — and a company losing money has no P/E at all, because there is no profit to divide the price by. A low EPS can mean a bargain, or a business in trouble: check whether the profit fell or the share count grew.
Trailing vs forward EPS
The trailing EPS uses the last twelve months of profit — what the company actually earned. The forward EPS uses forecast profit — what analysts expect it to earn — and it is usually higher, because profit is expected to grow. Use the trailing EPS when you want facts, and the forward EPS when you want the market’s guess. Never mix them: a trailing $2.00 against a forward 2.50 is two different measures.
The EPS vs the P/E
The price-to-earnings ratio is the share price divided by earnings per share — price per dollar of earnings — while the EPS is the earnings per share itself. They are two sides of the same coin: the EPS is the “E” in the P/E. The EPS tells you the profit per share; the P/E tells you what the market charges for it. Check both before you judge. Read the guide to the price-to-earnings ratio and try the price-to-earnings ratio calculator and the price-to-sales ratio calculator for the price side.