Earnings per Share (EPS)

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Earnings per share (EPS) is the portion of the company’s distributable profit which is allocated to each outstanding equity share (common share). Earnings per share is a very good indicator of the profitability of any organization, and it is one of the most widely used measures of profitability.

The earning per share is a useful measure of profitability, and when compared with EPS of other similar companies, it gives a view of the comparative earning power of the companies. EPS when calculated over a number of years indicates whether the earning power of the company has improved or deteriorated. Investors usually look for companies with steadily increasing earnings per share.

Growth in EPS is an important measure of management performance because it shows how much money the company is making for it’s shareholders, not only due to changes in profit, but also after all the effects of issuing of new shares (this is especially important when the growth comes as a result of acquisition).

Calculation (Formula)

The EPS is calculated by dividing net profit after taxes and preference dividends by the number of outstanding equity shares. This can be expressed in terms of the following formula:

EPS formula

If the capital structure changes (i.e. the number of shares changes) during the reporting period, a weighted average number of equity shares is used to for the calculations of EPS.

The diluted earning per share (Diluted EPS) expands on basic EPS and includes the shares of all convertible securities if they were exercised. Convertible securities are convertible preferred shares, stock options (usually employee based), convertible debentures and warrants.

Norms and Benchmarks

It should be noted that two different companies could generate the same EPS but one could do so with a lesser equity. All other things being equal, this company is better than the other one because it is more efficient at using its capital for generating profits.

It is important that the investors do not rely on only measure of earnings per share for making investment decisions. Instead they should use in conjunction with other measures and financial statement analysis

Earnings per share (EPS) is an important metric for investors because it provides insight into a company's profitability on a per-share basis. Here are a few reasons why EPS is important for investors:

  1. Measure of profitability. EPS indicates how much profit a company is generating for each outstanding share of its common stock. This helps investors determine whether a company is profitable and how much profit it is generating per share.

  2. Comparison tool. EPS allows investors to compare the financial performance of different companies within the same industry or sector. By comparing EPS of different companies, investors can determine which companies are more profitable and have a better potential for growth.

  3. Valuation metric. EPS is an important factor in determining a company's valuation. A higher EPS generally indicates that a company is more profitable, which can increase its stock price and market capitalization.

  4. Growth potential. EPS growth can also indicate a company's potential for future growth. Companies with a high EPS growth rate are generally seen as more attractive to investors, as they have the potential to increase their earnings and share price over time.

Diluted earnings per share (EPS)

Diluted earnings per share (EPS) is a measure of a company's profitability that takes into account the potential dilution from convertible securities, such as stock options, warrants, and convertible bonds. Diluted EPS reflects the total number of shares that would be outstanding if all convertible securities were exercised or converted into common stock.

The basic EPS formula calculates earnings per share based on the total number of outstanding shares of common stock. However, if a company has convertible securities, such as stock options or convertible bonds, these securities may be converted into common stock, which can dilute the number of outstanding shares.

To account for potential dilution, the diluted EPS formula adjusts the number of outstanding shares by adding the additional shares that would be created if all convertible securities were exercised or converted into common stock. This results in a lower diluted EPS value compared to basic EPS.

The formula for diluted EPS is:

Diluted EPS = (Net Income - Preferred Dividends) / (Weighted Average Shares + Dilutive Securities)


  • Net Income (or Net Profit after Taxes) is the total profit earned by the company after deducting all expenses, taxes, and interest payments.
  • Preferred Dividends are any dividends paid to preferred shareholders that reduce the net income available to common shareholders.
  • Weighted Average Shares are the total number of common shares outstanding over a specified period, adjusted for any stock splits or issuances.
  • Dilutive Securities are convertible securities that, if exercised or converted, would increase the number of outstanding shares of common stock.

Diluted EPS is an important financial metric that helps investors and analysts assess a company's potential dilution from convertible securities and better understand the true value of a company's earnings per share.

Quote Asha Kanta Sharma, 29 March, 2020

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