Earnings per share (EPS) measures the portion of a company's net income allocated to each outstanding share of common stock. It is a key metric for comparing profitability across companies and is the denominator in the price-to-earnings (P/E) ratio. Both basic and diluted EPS are reported in financial statements.
Formula
Basic EPS = (Net Income - Preference Dividends) / Weighted Average Shares OutstandingIn Depth
EPS distils a company's entire profitability story into a single per-share number, making it one of the most widely followed financial metrics. It enables comparison across companies of different sizes and is the basis for the P/E ratio, the most commonly used valuation multiple.
Basic EPS divides net income available to common shareholders by the weighted average number of shares outstanding. Diluted EPS adjusts for the potential dilution from stock options, warrants, convertible debt, and other instruments that could become shares.
For FP&A teams in listed companies, EPS forecasting is critical because market consensus EPS expectations drive share price movements. Missing consensus by even a few pennies can trigger significant share price reactions. FP&A teams build detailed EPS models that account for net income forecasts, share count changes from buybacks or issuances, and the dilutive effect of employee stock options.
EPS growth is a primary metric for investors evaluating company performance. Consistent EPS growth often commands premium valuation multiples, while declining EPS can trigger investor concern.
For UK companies, EPS must be calculated and reported in accordance with IAS 33 (for IFRS reporters) or FRS 102 Section 33. The calculation must account for any preference share dividends paid (which reduce the earnings available to ordinary shareholders).
Real-World Example
A UK AIM-listed company reports £4.2M net income with 20M weighted average shares outstanding. Basic EPS is 21p. The company has 2M outstanding options with an average exercise price of 80p. Using the treasury stock method with a market price of £2.50, diluted shares are 21.28M, giving diluted EPS of 19.7p. The FP&A team forecasts next year's EPS of 25p, representing 19% growth.
Related Terms
Net income, also called net profit or the bottom line, is the total profit remaining after all expen...
The price-to-earnings (P/E) ratio compares a company's share price to its earnings per share, indica...
A share option scheme gives employees the right to purchase company shares at a predetermined price ...
Dilution is the reduction in existing shareholders' ownership percentage that occurs when new shares...
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