What is earnings per share?
EPS tells shareholders how much profit the company earned for each share they own. It is reported on the face of the income statement by listed companies under IAS 33 Earnings per Share.
Formulas
Basic EPS = (Net income − Preferred dividends) ÷ Weighted average ordinary shares
Diluted EPS adjusts for all potential shares, such as share options, convertible bonds and warrants, that could reduce EPS if exercised.
Example
A company earns net income of $2,000,000, pays $200,000 of preferred dividends and has a weighted average of 900,000 ordinary shares.
Basic EPS = (2,000,000 − 200,000) ÷ 900,000 = $2.00
If 100,000 options could convert into shares, diluted EPS ≈ 1,800,000 ÷ 1,000,000 = $1.80.
How EPS is used
- Price-to-earnings (P/E) ratio = Share price ÷ EPS
- Tracking profit growth per share over time
- Comparing performance after share issues or buybacks
Limitations
EPS can be lifted by share buybacks without real profit growth, and it can be affected by one-off items. Look at adjusted EPS, cash flow and the quality of earnings too.