New to this? Read the plain English guide first.
Turn net income and share count into earnings per share, the number Wall Street watches most.
Earnings per share, or EPS, shows how much profit a company earned for each share of common stock. It puts profit on a per owner basis, which makes it easy to compare results over time and to calculate ratios such as P/E. Because the share count can change, EPS captures dilution that total profit hides.
EPS equals net income minus preferred dividends, divided by the weighted average number of common shares outstanding. Diluted EPS also counts shares that could be created from options and convertible securities.
A company earns $12 million in net income, pays no preferred dividends and has 8 million weighted average shares. EPS is 12 million divided by 8 million, or $1.50. If the company issues another 2 million shares next year and profit stays the same, EPS falls to $1.20 even though total profit did not change.
Track EPS across at least five years and look at the trend. Check whether growth comes from rising profit or from buying back shares. Use diluted EPS when you value a stock, since it is the more conservative measure.
Ignoring one time gains that inflate a single year, using basic EPS when the share count is rising fast, and forgetting that EPS says nothing about cash flow or debt.
Read how to read an earnings report and try the P/E ratio calculator. See every term in the investing glossary, try more tools in investor tools, or test yourself in Stock Jeopardy.
For education only, not investment advice. Results are estimates based on the numbers you enter.