Earnings per share (EPS): What it is and how to calculate it

What is earnings per share?

Earnings per share (EPS) is a company’s net income attributable to common shareholders per share (and it can be negative). A simplified way to describe EPS is that it divides net income attributable to common shareholders by the weighted average number of common shares outstanding. Breaking this down, we get:

Company profit = the net income of a company is the money it makes after expenses, such as operating costs, interest and tax) have been deducted.

Outstanding common stock = Outstanding shares are shares issued and held by shareholders (excluding treasury shares). The counter to common stock is preferred stock (more on this later).

When net income attributable to common shareholders is divided by weighted average common shares outstanding, the result is the EPS.

The earnings per share formula: How to calculate earnings per share 

You can already see how to calculate earnings per share. When everything we’ve said so far gets put into a formula, we get: 

EPS = (Net income − preferred dividends) ÷ weighted average shares outstanding

The one variable not yet covered is preferred dividends. Public companies can be structured in a way that allows them to have two types of stock: preferred and common. Preferred stock is a separate class of shares that can have different economic rights from common stock. The rights and terms of preferred stock depend on the company’s share structure, articles and applicable rules. 

Preferred stockholders can have different rights from common stockholders. Preferred stock often has limited or no voting rights, although terms vary by company and share class. That means preferred shareholders may have less voting influence than common shareholders, depending on the terms of the shares. 

However, preferred shareholders may have priority over common shareholders for dividend payments, depending on the terms of the preferred shares. If preferred dividends are due, they are deducted before calculating EPS attributable to common shareholders. This hierarchy means preferred dividends are deducted from net income when calculating EPS attributable to common shareholders. 

A company’s financial statements and notes may include information about preferred stock and dividend obligations. Once net income, preferred dividends and weighted average common shares outstanding are known, EPS can be calculated. 

Where to find EPS data 

EPS data can usually be found in a company’s earnings report or financial statements. You can click here for a guide to reading an earnings report. Earnings reports are easier to read when investors know which figures they are reviewing and why. There are three main things to focus on: 

Earnings per share: EPS relates a company’s earnings to its share count and is widely used in earnings analysis. It can be affected by factors such as share issuance, buybacks, one-off items and accounting choices, so it should be considered alongside other metrics. A higher EPS or stronger EPS growth may be positive in some contexts, but interpretation depends on valuation, expectations, comparisons with previous periods and comparisons with peers.

Beating/missing estimates: Earnings reports can be compared with analyst estimates or company guidance where available. Analysts publish estimates, including revenue, EPS, losses, and sales. Share prices may react to results versus expectations, but reactions are not predictable and depend on guidance, positioning, and broader market conditions.

Guidance: This is forward-looking commentary from the company about expected performance, business conditions or financial targets, where provided. Guidance can influence the share price, but the impact varies and depends on expectations, valuation, market conditions and other information in the report.

Types of earnings per share data

Earnings per share can be reported or estimated in different ways, so it is important to know which version is being used. The main distinction is between EPS based on reported results and EPS based on estimates.

Trailing earnings per share

Trailing EPS uses historical earnings data from previous reporting periods. For example, trailing twelve-month EPS usually uses net income from the previous four quarters. This data is combined and used to generate a trailing EPS number.

Price-to-earnings (P/E) ratios are often calculated using trailing EPS because the earnings figures are based on reported results. However, trailing EPS only reflects past performance and may not capture changes in future earnings expectations.

Forward or estimated earnings per share 

Forward EPS uses projections rather than reported results. These projections may be based on analyst estimates, company guidance or both, depending on the data provider. 

Forward EPS can help investors understand what the market expects future earnings to look like, but estimates can change as new company information, analyst assumptions or market conditions change. 

Using EPS data in context

Relying on a single EPS measure can give an incomplete view. Trailing EPS can show how a company has performed, while forward EPS can show what analysts or the company expect in future periods. 

Investors often compare trailing EPS, forward EPS and other financial metrics to build a broader view of company performance. If you focus on one, be clear whether you’re using trailing or estimated EPS, and consider the limitations of each. 

What does earnings per share tell us about a company? 

Earnings per share show how much earnings are attributable to each common share over a given period. Profit or loss data is useful, but it doesn’t adjust for the number of shares outstanding. EPS adjusts earnings by the weighted average number of common shares outstanding. This shows earnings or losses attributable to each common share. 

This matters because public companies can have different share counts. Share count affects how total earnings translate into earnings per share. Share issuance, buybacks and dilution can all affect EPS. For this reason, EPS is usually assessed alongside share count changes and other financial metrics. 

Unlike other metrics in trading, there isn’t a set figure for earnings per share data. EPS is usually interpreted by comparing it with previous periods, analyst expectations, peers and valuation metrics. It’s also worth saying that you shouldn’t rely on EPS calculations alone. EPS can be useful, but it should not be the only metric used to assess a company. 

Finally, EPS data does not guarantee a positive trade or investment outcome. A company can report strong EPS and still see its share price fall if expectations, valuation, guidance or market conditions disappoint. Trading and investing always involve risk, and EPS does not remove that risk. 

Benefits and limitations of earnings per share analysis

Learning how to calculate earnings per share can help investors understand one widely used profitability metric. For stock analysis, EPS is often useful because it connects earnings to the share count. But it’s also important to understand that these calculations aren’t the ultimate answer. They can’t tell you everything about the company and they shouldn’t be used on their own. EPS is widely used, but it has limitations when used in isolation.

Advantages of EPS data

Some benefits of using earnings per share are:

EPS relates a company’s earnings to its share count. That means EPS can influence valuation, but share prices also reflect expectations, growth, risk, and market conditions — a high EPS does not necessarily mean a high share price.

Calculating earnings per share is fairly simple. We’ve given you the formula and the context. Establishing a company’s EPS is easier than carrying out technical analysis, for example.

EPS gives investors a standardised way to compare earnings per share across periods and, in some cases, against peers. It should still be reviewed with revenue, margins, cash flow, debt and valuation.

Disadvantages of EPS data 

Some problems with using EPS numbers in isolation are:

EPS can be easier to interpret when a company is profitable, while negative EPS requires more context. Negative EPS is calculated the same way, but interpretation can be harder because losses can be affected by one-offs and accounting items.

How EPS can be used in stock analysis

It's worth repeating that EPS can be useful, but it should be reviewed alongside other measures of company performance, valuation and risk. Other data points investors often review include: 

Industry and economic context: Investors often review the industry a company operates in and the broader economic conditions that may affect performance. Economic conditions can affect revenue, costs, margins and investor expectations. 

Strategy and guidance: These can provide context for future expectations. Company guidance, where provided, can show how management expects the business to perform, while analyst estimates may show market expectations. 

Revenue, profit or loss and risk: Investors often review a company’s financials from a variety of angles. This can include revenue, margins, profitability, cash flow, debt and risk disclosures. Liabilities and risks can affect whether earnings are sustainable. Profitability should also be assessed across more than one reporting period where possible. Together, these figures help place EPS in context. 

Share price and valuation: Investors often compare the current share price with their estimate of the company’s value, using valuation metrics such as the P/E ratio.

News, data and market context: Investors may review company news, sector developments and macroeconomic data that could affect expectations. These sources can help explain why expectations for earnings or valuation may be changing. 

Together, these data points can give investors a broader view of a company’s current position, although future performance remains uncertain. 

Practising EPS analysis with a demo account 

Understanding EPS can help investors practise analysing company earnings, but it should not be used as a standalone trading signal. A demo account can be one way to practise using EPS data without placing live trades. Demo trading may help users understand platform tools and order placement, but remember that simulated performance may not always reflect live market conditions.

A demo account uses virtual funds, so users can practise without risking real money. Moving from a demo account to live trading involves real capital and market risk, so you should consider whether live trading is appropriate for your circumstances. 

EPS may support stock analysis, but live trading decisions should consider wider financial data, valuation, costs, risk tolerance and the possibility of loss.