Earnings per share (EPS) is the monetary value of
earnings per
outstanding share
Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus representi ...
of
common stock
Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Com ...
for a company. It is a key measure of corporate profitability and is commonly used to price stocks.
In the United States, the
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
(FASB) requires EPS information for the four major categories of the
income statement: continuing operations, discontinued operations, extraordinary items, and
net income.
Calculating
Preferred stock
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...
rights have precedence over common stock. Therefore, dividends on preferred shares are subtracted before calculating the EPS. When preferred shares are cumulative, annual dividends are deducted whether or not they have been declared. Dividends in
arrears
Arrears (or arrearage) is a legal term for the part of a debt that is overdue after missing one or more required payments. The amount of the arrears is the amount accrued from the date on which the first missed payment was due. The term is usually ...
are not relevant when calculating EPS.
;Basic formula
:Earnings per share =
;Net income formula
:Earnings per share =
;Continuing operations formula
:Earnings per share =
Diluted earnings per share
''Diluted earnings per share'' (diluted EPS) is a company's earnings per share calculated using fully diluted
shares outstanding (i.e. including the impact of
stock option grants and
convertible bonds). Diluted EPS indicates a "worst case" scenario, one that reflects the issuance of stock for all outstanding options, warrants and convertible securities that would reduce earnings per share.
Calculations
Calculations of diluted EPS vary.
Morningstar reports diluted EPS "Earnings/Share $", which is net income minus preferred stock dividends divided by the
weighted average
The weighted arithmetic mean is similar to an ordinary arithmetic mean (the most common type of average), except that instead of each of the data points contributing equally to the final average, some data points contribute more than others. The ...
of common stock shares outstanding over the past year; this is adjusted for dilutive shares. Some data sources may simplify this calculation by using the number of shares outstanding at the end of a reporting period. The methods of simplifying EPS calculations and eliminating inappropriate assumptions include replacing primary EPS with basic EPS, eliminating the treasury stock method of accounting from fully diluted EPS, eliminating the three-percent test for dual presentation, and providing information on individual dilative securities.
U.S. GAAP
Calculations of diluted EPS under
U.S. GAAP are described under Statement No. 128 of the Financial Accounting Standards Board (FAS No. 128). The objective of diluted EPS is to measure the performance of a company over the reporting period taking into account the dilutive effect of potential common stock that could be issued by the company. To compute diluted EPS, both the denominator (outstanding shares) and the numerator (earnings) may need to be adjusted.
''Diluted shares: ''
To calculate the total number of shares used in the calculation, FASB prescribes using the treasury method to calculate the dilutive effect of any instruments that could result in the issuance of shares, including:
* Stock options
* Warrants
* Convertible preferred stock
* Convertible bonds
* Share-based payment arrangements
* Written put options
* Contingently issuable shares
''Earnings: ''
The numerator used in calculating diluted EPS is adjusted to take into account the impact that the conversion of any securities would have on earnings. For example, interest would be added back
to earnings to reflect the conversion of any outstanding convertible bonds, preferred dividends would be added back to reflect the conversion of convertible preferred stock, and any impact of these changes on other financial items, such as royalties and taxes, would also be adjusted.
International financial reporting standards
Under
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fin ...
, diluted earnings per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential
common stock
Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Com ...
.
Dilutive potential common stock includes:
*
convertible debt
* convertible
preferred stock
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...
* share warrants
*
share options
In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date ...
* share rights
*
Employee stock purchase plans
* contractual rights to purchase shares
* contingent issuance contracts or agreement
See also
*
Accretion/dilution analysis
*
Dilutive security
*
P/E ratio
*
Whisper number
References
External links
European banks’ earnings announcements video
Earnings Per Share Screener figures from official financial statements
{{Authority control
Corporate finance
Fundamental analysis
Financial ratios