Earnings Per Share (EPS)

Profitability Metric Investment Wiki — Fundamentals
Earnings Per Share (EPS) calculates the portion of a company's total profit allocated to a single outstanding share of common stock. It serves as the bedrock indicator of corporate profitability and is the foundational variable for almost all fundamental valuation ratios on Wall Street, most notably the P/E ratio.
Quick Reference
Type Profitability Metric
Formula (Net Income - Preferred Dividends) ÷ Common Shares Outstanding
Good Target Consistent YoY Growth
Primary Use The denominator for the P/E and PEG ratios

1.0 The Formula

Basic Form

formulaBasic EPS = (Net Income - Preferred Dividends) / Average Outstanding Shares

Subtracting preferred dividends is crucial because preferred shareholders receive their payout before common equity holders. The Diluted EPS is functionally more accurate—it assumes all convertible bonds, stock options, and warrants are exercised, expanding the share pool and lowering EPS. You should universally use Diluted EPS.

Worked Example

Metric 2024 Result 2025 Result Growth
Net Income $100,000,000 $110,000,000 +10%
Shares Outstanding 50,000,000 45,000,000 -10%
Earnings Per Share $2.00 $2.44 +22%

Notice the magic of share buybacks. The company's raw profit (Net Income) only grew by 10%. But because the company aggressively bought back its own stock and reduced the share count by 10%, the EPS shot up by 22%. From an investor's perspective holding a single share, the value generated by the company jumped massively.

EPS on its own means nothing. A $10.00 EPS is not "better" than a $2.00 EPS. EPS is a completely arbitrary number dictated by how many shares the founder decided to issue at IPO. What matters is the Direction (is it growing?) and the Ratio against the stock price (the P/E ratio).

2.0 Interpretation & Edge Cases

Benchmarks

Wall Street runs on quarterly EPS expectations (“earnings beats” vs “earnings misses”).

  • A company trading at $50/share earning $1 EPS this year must show a pathway to $2, $3, or $5 EPS in the future, or the high valuation will violently correct.
  • Negative EPS: The company is losing money. Very common for early-stage software and biotech firms. When EPS is negative, investors default to Price-to-Sales (P/S) metrics to value the company.

When it Fails (Pitfalls)

EPS is the easiest number for accounting departments to legally manipulate. A CEO desperate to hit their Wall Street EPS growth target can:

  1. Aggressively buy back stock with debt to shrink the denominator.
  2. Sell off physical assets, creating a one-time spike in Net Income.
  3. Delay essential R&D expenses into the next quarter.
Net Income (the top half of EPS) is an accounting abstraction filled with depreciation, amortization, and non-cash items. Always verify that EPS growth is backed up by true Free Cash Flow growth.

3.0 Related Pages

P/E Ratio

The core valuation metric. Divides current Market Price by the EPS.

PEG Ratio

Takes the P/E ratio and normalizes it against the year-over-year percentage growth of the company's EPS.

Free Cash Flow (FCF)

The "honest" version of EPS. Provides the actual cash truth compared to the easily manipulated accounting rules underlying Net Income.