What is EPS (Earnings per Share)?
Earnings per Share measures how much profit is attributable to each common share after paying preferred dividends. It links the income statement to the share count and underpins core equity metrics like the P/E ratio, ROE, and market capitalization.
Analysts watch both basic EPS and diluted EPS to understand current profitability per share and the impact of potential dilution from stock options, RSUs, convertible bonds, and other equity-linked securities.
Formula
Example
Assume a company reports net income of $1,200,000 and no preferred dividends, with 1,000,000 weighted average common shares outstanding.
- Basic EPS = ($1,200,000 − $0) ÷ 1,000,000 = $1.20 per share.
Now assume the company has convertible debt that would add $30,000 of after-tax interest back to earnings and create 200,000 additional common shares if converted.
- Adjusted earnings = $1,200,000 + $30,000 = $1,230,000.
- Diluted share count = 1,000,000 + 200,000 = 1,200,000 shares.
- Diluted EPS = $1,230,000 ÷ 1,200,000 ≈ $1.03 per share.
In this example, diluted EPS is lower than basic EPS, showing how potential conversion of equity-linked instruments reduces earnings per share and affects valuation, capital allocation, and incentive design.