earnings per share (EPS)
An earnings measure calculated by subtracting the dividends paid to holders of preferred stock from the net income for a period and dividing that result by the average number of common shares outstanding during that period. EPS is the amount of reported income, on a per-share basis, that a firm has available to pay dividends to common stockholders or to reinvest in itself. As with other financial measures, EPS can vary with differing accounting techniques; therefore, reported EPS may give a very misleading signal as to how the firm is really doing. Also called income per share
, net income per share
. See also basic earnings per share
, diluted earnings per share
Case Study Companies often release several versions of earnings per share to the investment community. In October 2001 telecommunications company Convergys Corporation, a 1998 spinoff from Cincinnati Bell, announced its third-quarter operating earnings rose 12% to 31¢ per share from the prior year's 27¢ per share. At the same time the firm announced that cash earnings per share, excluding goodwill amortization and special items, increased 13%, to 35¢ from 31¢ during the year earlier period. However, earnings per share calculated according to generally accepted accounting principles specified by the Financial Accounting Standards Board were reported as 2¢ per share, down over 90% from 27¢ per share a year before. The shareholders' quandary is determining which measure of earnings per share most accurately represents the company's performance. Companies would like you to focus on the earnings report that is most favorable to the company and its management. In this instance investors must have considered operating income the most important measure of the firm's performance because Convergys stock closed up $1.80 at $28.00. A month later the stock was trading in the low 30s.
Earnings per share (EPS).
Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares.
For example, if a company earns $100 million in a year and has 50 million outstanding shares, the earnings per share are $2.
Earnings per share can also be calculated on a fully diluted basis, by adding outstanding stock options, rights, and warrants to the outstanding shares.
The results report what EPS would be if all of those options, rights, and warrants were exercised and the company had to issue more shares to meet its obligations.
Earnings and other financial measures are provided on a per share basis to make it easier for you to analyze the information and compare the results to those of other investments.