What is earnings per share (EPS)?
Learn what earnings per share (EPS) is, how to calculate it, and what it says about profitability.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Earnings per share (EPS) measures how much profit a business makes for each ordinary share on issue.
- You calculate EPS by taking net profit less preferred share dividends, then dividing by the average number of ordinary shares.
- A higher EPS usually signals stronger profitability, but it's best judged against a company's history and its industry peers.
- EPS has limits, so use it alongside other measures like the price-to-earnings (P/E) ratio and net profit.
Here's a closer look at what earnings per share is, how to calculate it, and what it can tell you.
Earnings per share
Earnings per share (EPS) measures a business's profitability per share. Investors and analysts use it as an indicator of a business's financial performance.
It shows how much profit is linked to each share held, and it's usually calculated quarterly and annually. The higher the EPS, the more profit sits behind each share, and the more valuable that share tends to look.
Working out EPS is straightforward once you know the parts that go into it.
How to calculate earnings per share
The formula shares a company's profit across its ordinary shares:
Earnings per share = (net profit - dividends on preferred shares) / average number of ordinary shares
Where:
- net profit is revenue minus expenses and taxes
- dividends on preferred shares is money paid to a special class of shareholder
- ordinary shares are the type traded on the sharemarket
By excluding dividends on preferred shares, EPS focuses on the profits connected to everyday shareholders. You can also link the net profit figure straight back to your accounts.
Using the average number of shares outstanding accounts for changes across the reporting period. It helps control for a company issuing or buying back shares during the year.
Here's a worked example. Say a business has $2 million in net profit and will pay $200,000 to owners of preferred shares, with 800,000 ordinary shares on issue.
($2,000,000 - $200,000) / 800,000 = $1,800,000 / 800,000 = $2.25
So the business earns $2.25 per share.
EPS comes in 2 main forms, depending on which shares you count.
Basic vs diluted EPS
There are 2 common ways to calculate EPS, and the difference comes down to whether you include shares that don't exist yet but could.
- Basic EPS: uses net profit minus preferred dividends, divided by the ordinary shares on issue. It's a straightforward measure of profitability.
- Diluted EPS: also counts convertible instruments that could turn into shares, such as stock options. It shows a worst-case EPS if all those potential shares came into existence.
Diluted EPS is usually lower than basic EPS, so investors often watch the gap between basic and diluted figures.
Once you can calculate EPS, it's worth knowing what investors actually do with it.
How EPS is used
Investors and analysts use EPS to compare the investment potential of different businesses. A high EPS suggests a business is profitable, which can support higher dividends and a stronger share price.
EPS also feeds into the price-to-earnings (P/E) ratio, which divides a company's share price by its EPS to gauge whether a share looks expensive or cheap. You can explore this and similar measures in the guide to profitability ratios.
There's no single number that counts as a good EPS, but there are useful ways to judge it.
What is a good EPS?
A good EPS is best judged in context rather than against a fixed benchmark. Compare a company's EPS with its own history and with the EPS of similar businesses in the same industry.
A rising EPS over time usually points to improving profitability. A negative EPS means the business made a loss over the period, so there were no earnings to spread across its shares.
EPS is quick to read, but it doesn't tell you everything about a business.
Limitations of EPS
While EPS is a fast way to measure a business's profitability, it leaves out some important context. On its own, it doesn't account for:
- the capital structure: a business can post a high EPS simply because it has fewer shares outstanding, while carrying high debt risk
- how a business generates its profits or how efficiently it uses its assets
- the effect of share buybacks, which cut the share count and can lift EPS without any real profit growth
- changes in accounting policies, which can distort EPS and make comparisons across periods less reliable
For a fuller picture, use EPS alongside other measures of financial health and consider how the wider industry is performing.
If you want to check a company's EPS, you'll usually find it in the same place.
Where to find EPS
Listed companies report EPS on their income statement, below net profit. You'll also see it summarised in annual reports and other financial statements.
For your own business, you can keep profit figures accurate and current with instant reporting from Xero.
Keeping an eye on profit is easier when your numbers stay up to date.
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FAQs on earnings per share
Here are answers to some frequently asked questions about earnings per share.
What's the difference between basic and diluted EPS?
Basic EPS counts only the ordinary shares currently on issue, while diluted EPS also includes shares that could be created from options and other convertible instruments. Diluted EPS gives a more cautious view for investors.
What does a negative EPS mean?
A negative EPS shows the company reported a net loss for the period, so there were no earnings per share to distribute. It doesn't always signal trouble, as early-stage or fast-growing businesses can run at a loss while they scale.
How does EPS relate to the P/E ratio?
The price-to-earnings (P/E) ratio divides a company's share price by its EPS, so EPS is a core input. A higher EPS lowers the P/E ratio at a given share price, which can make a share look better value.
What is trailing (TTM) EPS?
Trailing twelve months (TTM) EPS adds up a company's earnings per share over the most recent 4 quarters. It gives a current, rolling view rather than relying on a single financial year.
How do share buybacks affect EPS?
When a company buys back its own shares, the share count drops and EPS can rise even if profit stays flat. So it helps to check whether EPS growth comes from real earnings or simply a smaller share base.
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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.