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Earnings per Share: Basic, Diluted and How to Read the Figure

Earnings per share divides a company's profit among its shares. How basic and diluted EPS are calculated, why share counts change, and what EPS can hide.

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Key takeaways

  • Earnings per share is net income attributable to common shareholders divided by the weighted average number of common shares outstanding.
  • Diluted EPS assumes that options, warrants and convertible securities become shares, so it is usually a little lower than basic EPS.
  • EPS lets you compare results between companies of different sizes, and it is the denominator of the P/E ratio.
  • EPS can rise without any growth in profit if the share count falls, for example through buybacks.
  • Some companies also publish adjusted, non-GAAP EPS; the SEC requires them to show how it differs from the GAAP figure.

A company that earned $50 million last year sounds more successful than one that earned $5 million, until you learn the first has ten times as many shares. Earnings per share solves that problem by putting profit on a per-share basis. FINRA calls it one indication of a company's current financial strength and notes that it lets you compare the results of companies of different sizes.

The basic formula

EPS = (net income − preferred dividends) ÷ weighted average common shares outstanding.

Each piece has a reason:

  • Net income is the bottom line of the income statement, after all expenses and taxes. The SEC's beginners' guide describes EPS as how much money shareholders would receive for each share if the company distributed all its net income for the period, which companies almost never do.
  • Preferred dividends are subtracted because preferred shareholders have a prior claim; EPS is about common shareholders. What is a stock explains the two classes.
  • Weighted average shares are used because the share count changes during the year as shares are issued or bought back.

Worked example. Net income $50 million, preferred dividends $2 million, and a weighted average of 24 million common shares:

EPS = (50 − 2) ÷ 24 = $2.00.

Weighted average, explained

Suppose a company starts the year with 20 million shares and issues another 8 million at the start of the third quarter. They were outstanding for half the year, so the weighted average is 20 + 8 × ½ = 24 million, the figure used above. The international accounting standard IAS 33 describes the denominator in exactly these terms, as the weighted average number of shares outstanding for the period, affected by share issues, splits, buybacks and conversions.

Basic and diluted EPS

Companies may have securities that could turn into more shares: employee stock options, warrants, convertible bonds. Diluted EPS asks what each share's slice of earnings would be if those were converted.

Continuing the example, suppose potential conversions would add 1 million shares:

Measure Shares EPS
Basic 24 million $48m ÷ 24m = $2.00
Diluted 25 million $48m ÷ 25m = $1.92

Diluted EPS is equal to or lower than basic. IAS 33 requires both to be presented with equal prominence. Real calculations follow detailed accounting rules for which securities count and how; the simplified version above shows the idea. A large gap between the two means many potential new shares relative to the existing count.

What moves EPS

EPS can change because profit changes, or because the share count does:

  • More profit: EPS rises.
  • More shares (new issues, conversions): EPS falls for the same profit. This is dilution.
  • Fewer shares (buybacks): EPS rises for the same profit. Stock buybacks explains why that can flatter growth figures.
  • Stock splits: EPS is restated on the new share count, with no economic change; see stock splits.

So "EPS grew 10%" is worth checking against net income: did the business earn more, or were there fewer shares?

A hypothetical example. A company earns the same net income each year while buying back shares:

Year Net income Weighted shares EPS
1 $100 million 100 million $1.00
2 $100 million 95 million about $1.05
3 $100 million 90 million about $1.11

EPS rose by about 11% over two years while profit did not grow at all. That may be a perfectly reasonable use of cash, but it is a different story from a business that is earning more.

Adjusted EPS and other variations

Some companies also report "adjusted" EPS, excluding items they consider one-off. These are non-GAAP measures. Investor.gov's guide to 10-K and 10-Q reports explains that companies may present non-GAAP numbers, but must show how they differ from the most comparable GAAP measure, and that it is up to investors to decide how much weight to give them. Compare adjusted figures with the GAAP numbers before relying on them; how to read an earnings report shows where each appears.

How EPS is used

  • Valuation. EPS is the denominator of the P/E ratio.
  • Comparison. FINRA notes EPS lets you compare the results of companies of different sizes.
  • Growth. Comparing EPS across several years is cleaner on a diluted, split-adjusted basis, for the reasons above.

The lessons in Learn to Trade Stocks Beginner start with what a share of ownership means, and you practise with a virtual balance. It is one of our education apps, and the investing basics hub lists the related guides.

Good to know

Frequently asked questions

What is earnings per share?
A company's profit for a period divided by its number of shares. FINRA describes it as total earnings divided by the number of shares, which lets you compare the financial results of companies of different sizes. It appears near the bottom of the income statement.
What is the difference between basic and diluted EPS?
Basic EPS uses the weighted average number of shares actually outstanding. Diluted EPS also counts shares that could be created from options, warrants and convertible securities, so it shows what each share's slice of earnings would be if those were converted. Diluted EPS is usually equal to or lower than basic.
How can EPS rise if profit stays the same?
By reducing the share count. If a company buys back and retires shares, the same net income is divided among fewer shares, so EPS rises even though the business earned no more.
What is adjusted EPS?
A figure that removes items management considers unusual, such as restructuring costs. It is a non-GAAP measure. Investor.gov notes companies may present non-GAAP measures but must show how they differ from the most comparable GAAP measure, and that it is up to investors how much weight to give them.

Sources

  1. Evaluating Stocks (opens in a new tab)FINRA — accessed
  2. Beginners' Guide to Financial Statements (opens in a new tab)U.S. Securities and Exchange Commission — accessed
  3. IAS 33 Earnings per Share (opens in a new tab)IFRS Foundation — accessed
  4. How to Read a 10-K/10-Q (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed

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