Earnings per share
Learn what earnings per share (EPS) is, how to calculate it, and how investors use it to judge profitability.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Earnings per share (EPS) shows how much of a company's profit belongs to each ordinary share
- You work it out by dividing net profit (after preferred dividends) by the average number of ordinary shares
- Investors and analysts use EPS to compare businesses and to calculate the price-to-earnings (P/E) ratio
- There's no universal "good" number: EPS is best judged against a company's own history, its industry, and analyst expectations
What is earnings per share?
Earnings per share (EPS) measures a business's profit for each ordinary share outstanding. Investors and analysts use it as an indicator of financial performance, because it shows how much profit sits behind every share.
A higher EPS generally points to more profit per share, which is why it's one of the most widely quoted numbers when people size up a company's results.
How to calculate earnings per share
You calculate EPS by taking a company's profit, removing what's owed to preferred shareholders, then spreading the rest across its ordinary shares. Here's the formula:
Earnings per share = (net profit minus dividends on preferred shares) / average number of ordinary shares
Say a company reports $2,000,000 in net profit and pays $200,000 in dividends on preferred shares, with 800,000 ordinary shares outstanding. That leaves $1,800,000 to divide across those shares, giving an EPS of $2.25 per share.
What are weighted average shares?
The share count in the formula is usually a weighted average rather than a single fixed number. That's because companies issue new shares or buy back existing ones during a reporting period, so the total changes over time.
A weighted average reflects how many shares were on issue during each part of the period, so the EPS figure isn't skewed by a change that happened near the end.
Basic EPS vs diluted EPS
There are two versions of the measure, and the difference comes down to which shares you count. Both start from net profit minus preferred dividends.
Basic EPS divides that profit by the ordinary shares currently outstanding. Diluted EPS also counts convertible instruments, such as stock options, as if they'd been converted into shares. Because that spreads profit across a larger share count, diluted EPS gives you a more cautious, worst-case figure.
How EPS is used
Investors and analysts use EPS to compare businesses and judge how profitable they are on a per-share basis. A higher EPS suggests a company is generating more profit for each share its owners hold.
EPS also feeds into the price-to-earnings (P/E) ratio, which divides a company's share price by its EPS. That ratio shows how much investors are paying for each dollar of earnings, which helps them weigh up whether a share looks expensive or good value.
What is a good EPS?
There's no single number that counts as a "good" EPS, because the figure only means something in context. What looks strong for one business can be modest for another.
EPS is best judged against a company's own history, the results of its industry peers, and what analysts expected. A figure that rises steadily over time is generally seen as a positive sign of improving profitability.
Limitations of EPS
EPS is useful, but it doesn't tell the whole story on its own. It ignores a company's capital structure, including how much debt it carries, and it says nothing about how efficiently the business uses its assets.
The number can also be distorted by share buybacks, new share issuance, stock splits, and one-off items such as the sale of an asset. For that reason, it's best read alongside other measures rather than in isolation.
Track your profitability with Xero
EPS is a public-company metric, but the profit behind it matters to any business owner who wants a clear read on performance. With accurate books and up-to-date reports, you can keep an eye on your profitability and make more confident decisions. Try Xero and get one month free.
FAQs on earnings per share
Here are answers to some frequently asked questions about earnings per share.
What is the difference between basic and diluted EPS?
Basic EPS divides profit (after preferred dividends) across the ordinary shares currently outstanding. Diluted EPS also counts convertible instruments like stock options as if they'd been converted, so it spreads profit across more shares and gives a lower, more cautious figure.
What is a good EPS?
There's no fixed number that's "good" across the board, since EPS only makes sense in context. Compare it to the company's past results, its industry peers, and analyst expectations to see whether it's strong.
What does a negative EPS mean?
A negative EPS means the company made a loss over the period rather than a profit. It can happen to young or fast-growing businesses, so it's worth checking the trend and the reasons behind it.
How is EPS different from the P/E ratio?
EPS tells you how much profit sits behind each share, while the P/E ratio divides the share price by EPS. The P/E ratio uses EPS as an input to show how much investors are paying for each dollar of earnings.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.