Terms Of The Trade: Earnings Per Share

In the stock market, earnings season is always either in full swing or just around the corner. One of, if not the, most anticipated figures investors and market spectators are anxious to receive from publicly-traded companies is their “EPS,” or earnings per share.

It’s easy to understand basic earnings per share and just as easy to calculate, although some companies also report a separate figure called diluted EPS (to account for dilution of shares if all stock options, convertible bonds, etc., were exercised and new shares were issued, causing the EPS to decline). EPS is simply the net income, or "bottom-line number," divided by the number of outstanding shares of common stock.

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Thus:

If company X earns $1 million in net income and has 2 million shares outstanding, the EPS is $0.50 (1 million divided by 2 million).

Earnings per share is the foundation of a group of financial ratios used by investors to evaluate the fundamentals of a company, including the price-to-earnings ratios and price-to-earnings growth ratios.

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