Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. It is common for a company to report EPS that is adjusted for extraordinary items and potential share dilution. The higher a company’s EPS, the more profitable it is considered.
Earnings per share calculation:
Net income – preferred dividends/End-of-periods shares outstanding
Important of EPS:
The earnings per share metric is one of the most important variables in determining a share’s price. It is also a major component used to calculate the price to earnings (P/E) valuation ratio, where the E in P/E refers to EPS. By dividing a company’s share price by its earnings per share, an investor can see the value of a stock in terms of how much the market is willing to pay for each price of earnings.