View source for Earnings per share

{{Short description|Value of earnings per outstanding share of common stock for a company}}
{{for|other uses of EPS|EPS (disambiguation){{!}}EPS}}
{{technical|date=December 2024}}
{{accounting}}
'''Earnings per share''' ('''EPS''') is the monetary value of [[earnings]] per [[outstanding share]] of [[common stock]] for a company during a defined [[accounting period|period of time]], often a year. It is a key measure of corporate profitability, focusing on the interests of the company's owners ([[shareholder]]s),<ref name=drake>Drake, P. P., Financial ratio analysis, p. 11, published on 15 December 2012</ref> and is commonly used to price stocks.<ref>{{cite web |title=Earnings per share |url=https://www.bankrate.com/glossary/e/earnings-per-share/#:~:text=What%20is%20earnings%20per%20share,its%20shares%20of%20stock%20outstanding. |publisher=Bankrate.com}}</ref>

In the United States, the [[Financial Accounting Standards Board]] (FASB) requires EPS information for the four major categories of the [[income statement]]: continuing operations, discontinued operations, extraordinary items, and [[net income]].

==Calculation==
[[Preferred stock]] rights have precedence over common stock. Therefore, dividends on preferred shares are subtracted before calculating the EPS. When preferred shares are cumulative (i.e. dividends accumulate as payable if unpaid in the given accounting year), annual dividends are deducted whether or not they have been declared. Dividends in [[arrears]] are not relevant when calculating EPS. "Average common shares" in the formulae below refers to the average number of common shares outstanding during the time period.<ref name=drake />

;Basic formula
:Earnings per share = {{big|{{sfrac|profit − preferred dividends|weighted average common shares}}}}{{clarify|reason=Weighted in what way?|date=March 2025}}

;Net income formula
:Earnings per share = {{big|{{sfrac|net income − preferred dividends|average common shares}}}}

;Continuing operations formula
:Earnings per share = {{big|{{sfrac|income from continuing operations − preferred dividends|weighted average common shares}}}}

==Diluted earnings per share==
''Diluted earnings per share'' (diluted EPS) is a company's earnings per share calculated using fully diluted [[shares outstanding]] (i.e. including the impact of [[Employee stock options|stock option]] grants and [[convertible bond]]s). Diluted EPS indicates a "worst case" scenario, one that reflects the issuance of stock for all outstanding options, warrants and convertible securities that would reduce earnings per share.<ref>{{cite web |title=Diluted Earnings Per Share (Diluted EPS) |publisher=[[Investopedia.com|Investopedia ULC]] |url=http://www.investopedia.com/terms/d/dilutedeps.asp |access-date=2008-03-02}}</ref>

===Calculations===
Calculations of diluted EPS vary. [[Morningstar, Inc.|Morningstar]] reports diluted EPS "Earnings/Share $", which is net income minus preferred stock dividends divided by the [[weighted average]] of common stock shares outstanding over the past year; this is adjusted for dilutive shares.<ref>{{cite web |title=Earnings/Share $ - Morningstar.com Glossary E-F |publisher=[[Morningstar, Inc.|Morningstar]] |url=http://search.morningstar.com/Glossary/Glossary_E_F.html |access-date=2008-03-02 |url-status=dead |archive-url=https://web.archive.org/web/20080317095105/http://search.morningstar.com/Glossary/Glossary_E_F.html |archive-date=2008-03-17 }}</ref><ref>{{cite web |title=Diluted EPS - Morningstar.com Glossary D-D |publisher=[[Morningstar, Inc.|Morningstar]] |url=http://search.morningstar.com/Glossary/Glossary_C_D.html |access-date=2008-03-02 |url-status=dead |archive-url=https://web.archive.org/web/20080218221328/http://search.morningstar.com/Glossary/Glossary_C_D.html |archive-date=2008-02-18 }}</ref> Some data sources may simplify this calculation by using the number of shares outstanding at the end of a reporting period.<ref>{{cite web |title=Earnings Per Share (EPS) |publisher=[[Investopedia.com|Investopedia ULC]] |url=http://www.investopedia.com/terms/e/eps.asp |access-date=2008-03-02}}</ref> The methods of simplifying EPS calculations and eliminating inappropriate assumptions include replacing primary EPS with basic EPS, eliminating the treasury stock method of accounting from fully diluted EPS, eliminating the three-percent test for dual presentation, and providing information on individual dilative securities.<ref>{{Cite journal|last=R. David Jr.|first=Mautz|title=Relieving the burden of EPS reporting: some practical suggestions. (earnings per share)|url=http://archives.cpajournal.com/old/10505010.htm|journal=The CPA Journal Online|date=March 1991}}</ref>

===U.S. GAAP===
Calculations of diluted EPS under [[Generally Accepted Accounting Principles (United States)|U.S. GAAP]] are described under Statement No. 128 of the Financial Accounting Standards Board (FAS No. 128).<ref>{{cite web |title=FAS Statement No. 128 |publisher=[[FASB]] |url=http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175823287413&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs|access-date=2013-02-18}}</ref> The objective of diluted EPS is to measure the performance of a company over the reporting period taking into account the dilutive effect of potential common stock that could be issued by the company. To compute diluted EPS, both the denominator (outstanding shares) and the numerator (earnings) may need to be adjusted.

''Diluted shares: ''
To calculate the total number of shares used in the calculation, FASB prescribes using the treasury method to calculate the dilutive effect of any instruments that could result in the issuance of shares, including:
* [[Stock options]]
* [[Warrant (finance)|Stock Warrants]]
* [[Convertible preferred stock]]
* [[Convertible bonds]]
* [[Share-based payment arrangements]] 
* [[Written put options]]
* [[Contingently issuable shares]]

''Earnings: ''
The numerator used in calculating diluted EPS is adjusted to take into account the impact that the conversion of any securities would have on earnings. For example, interest would be added back<ref>{{Cite web|last=Nalurita|first=Febria|title=IMPACT OF EPS ON MARKET PRICES AND MARKET RATIO|url=https://www.researchgate.net/publication/335844356}}</ref> to earnings to reflect the conversion of any outstanding convertible bonds, preferred dividends would be added back to reflect the conversion of convertible preferred stock, and any impact of these changes on other financial items, such as [[royalties]] and [[corporate tax|taxes]], would also be adjusted.

One way to consider the effect of dilutive instruments on EPS is to think about the "as if" method, in the sense that "if the instrument is converted, how does it affect EPS?" For example, let Company XYZ have net income = $2,000,000, there are 50,000 shares of common stock outstanding, and $1,000,000 of 10% bonds, convertible into 50,000 shares of common stock. Company A's tax rate is 25%.{{clarify|reason=Are Company XYZ and Company A the same?|date=March 2025}}
Basic EPS = ($2,000,000 - ($1,000,000*10%))/50,000 = $38 
Diluted EPS = ($2,000,000 + (25%*($1,000,000*10%))) / 50,000 + 50,000 = $20.25
Note that other than accounting for the shares of common stock added in the denominator of the EPS equation, we also add back the taxes that would have been taken out from net income if the bonds were not converted. In conclusion, the "as if" method is helpful in considering the effect on dilutive instruments on EPS because it helps us think about the overall effect rather than just thinking about the numerator and denominator of the equation separately.{{cn|date=March 2025}}

===International financial reporting standards===
Under [[International Financial Reporting Standards]], diluted earnings per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential [[common stock]].<ref name=Deloitte>{{cite web |title=Summaries of International Financial Reporting Standards: IAS33 Earnings per share |publisher=[[Deloitte Touche Tohmatsu]] |year=2008 |url=http://www.iasplus.com/standard/ias33.htm |access-date=2008-03-02}}</ref> Dilutive potential common stock includes:<ref name=Deloitte />
* [[convertible debt]]
* convertible [[preferred stock]]
* share warrants
* [[Employee stock options|share options]]
* share rights
* [[Employee stock purchase plan]]s
* contractual rights to purchase shares
* contingent issuance contracts or agreements.
The earnings per share requirements of U.S. GAAP, FASB ASC 260: EPS, are a result of the FASB's cooperation with the IASB to narrow the difference between IFRS and US GAAP. A few differences remain.

The differences that remain are the result of differences in the application of the treasury stock method, the treatment of contracts that may be settled in shares or cash, and contingently issuable shares.

==See also==
*[[Accretion/dilution analysis]]
*[[Dilutive security]]
*[[P/E ratio]]
*[[Whisper number]]

==References==
{{Reflist|2}}

==External links==
*[https://archive.today/20130204074835/http://training.thomsonreuters.com/video/v.php?v=326 European banks’ earnings announcements], video
*[http://www.macroaxis.com/invest/marketScreener/sector/Earnings_Per_Share Earnings Per Share Screener]-  figures from official financial statements
*[http://www.stockcalculation.com/2014/07/pe-calculator.html Price-To-Earning Ratio calculator]

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[[Category:Corporate finance]]
[[Category:Fundamental analysis]]
[[Category:Financial ratios]]