# Earnings Per Share Formula

Net income divided by shares outstanding

## What is Earnings Per Share (EPS)?

EPS is a financial ratio, which counts net earnings against the total outstanding shares over a fixed period of time. A higher ratio indicates a company’s sound ability to produce valid returns. A single EPS value for a company is pretty arbitrary, but the ratio is more valuable when analyzed against other companies in the industry. Between two companies of the same business and similar size, a higher EPS indicates better profitability. EPS may often be utilized in conjunction with the price-to-book ratio.

### EPS Formula

There are several ways to calculate earnings per share. Below are two versions:

EPS = (Net Income – Preferred Dividends) / Shares Outstanding

EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding

The first formula uses total outstanding shares to calculate EPS, but in practice analysts may use weighted average when calculating the denominator. Since outstanding shares can change over time, analysts often use last period shares outstanding.

There is also often talk of diluted EPS in financial reports. Diluted EPS includes options, convertibles and warrants outstanding that can possibly affect total shares outstanding when exercised.

Another type of earnings per share is adjusted EPS. This removes all non-core profits and losses, such as those in minority interests. The focus of this calculation is to see only profit or loss generated from core operations.

### EPS Example

CFI Ltd has a net income of \$1 million in the third quarter. The company announces preferred dividends of \$250,000. Total shares issued for the period was 12,000,000, with total shares outstanding at 11,000,000.

The EPS of CFI Ltd. would be:

EPS = (\$1,000,000 – \$250,000) / 11,000,000
EPS = \$0.068

If every share were to receive an equal slice of the pie of net incomes, they would each receive \$0.068.