earnings per share

Fin

a financial ratio that measures the portion of a company’s profit allocated to each outstanding share of common stock. It is the most basic measure of the value of a share, and also is the basis for calculating several other important investment ratios.

EXAMPLE

EPS is calculated by subtracting the total value of any preferred stock from net income (earnings) for the period in question, then dividing the resulting figure by the number of shares outstanding during that period.

Net income – Dividends on any preferred stock/Average number of shares outstanding

Companies usually use a weighted average number of shares outstanding over the reporting period, but shares outstanding can either be “primary” or “fully diluted.” Primary EPS is calculated using the number of shares that are currently held by investors in the market and able to be traded. Diluted EPS is the result of a complex calculation that determines how many shares would be outstanding if all exercisable warrants and options were converted into shares at the end of a quarter.

     Suppose, for example, that a company has granted a large number of share options to employees. If these options are capable of being exercised in the near future, that could significantly alter the number of shares in issue and thus the EPS–even though the net income is the same. Often in such cases, the company might quote the EPS on the existing shares and the fully diluted version.

Abbr. EPS