How to Calculate EPS: Step-by-Step Earnings Per Share Guide

Understanding the EPS Calculation

Earnings per share (EPS) measures a company's profit allocated to each outstanding share of common stock. Before diving into the calculation steps, let's understand what we're trying to accomplish.

The EPS formula answers a simple question: how much profit did the company generate for each share of stock? This normalizes profits for comparison purposes. A company earning $100 million with 50 million shares generates $2.00 per share, making it comparable to other companies regardless of their size.

Two types of EPS are commonly calculated:

• Basic EPS: Uses only currently outstanding shares
• Diluted EPS: Includes potential shares from options, convertibles, etc.

This guide covers both calculations step by step.

Step 1: Find Net Income

Net income is the starting point for EPS calculation. It represents the company's total profit after all expenses, interest, and taxes.

Where to Find Net Income

Net income appears at the bottom of the income statement (also called the statement of operations or profit and loss statement). Look for terms like:

• Net Income
• Net Profit
• Net Earnings
• Profit After Tax

Which Income Statement to Use

For public companies, income statements are available in:

• 10-K filing: Annual report with full-year figures
• 10-Q filing: Quarterly reports
• Earnings press releases: Preliminary figures
• Company investor relations website: Links to all filings

For annual EPS, use the full-year net income. For quarterly EPS, use that quarter's net income. For trailing twelve months (TTM) EPS, sum the four most recent quarters.

Example: Finding Net Income

Company XYZ's Income Statement (simplified):

Net income for this company is $67,500,000.

Step 2: Identify Preferred Dividends

If the company has preferred stock, you must subtract preferred dividends from net income. Basic EPS measures earnings available to common shareholders only.

Where to Find Preferred Dividend Information

Look for preferred dividend information in:

• Income statement (sometimes listed below net income)
• Notes to financial statements
• Shareholders' equity section of the balance sheet
• The EPS calculation note (companies often disclose the components)

Types of Preferred Dividends

Preferred dividends may be:

• Cumulative: Accrue even if not declared; always subtract
• Non-cumulative: Only subtract if declared and paid

Example

If Company XYZ has preferred stock with $2,500,000 in annual dividends:

Earnings available to common = $67,500,000 - $2,500,000 = $65,000,000

If the company has no preferred stock, skip this step and use net income directly.

Step 3: Calculate Weighted Average Shares Outstanding

The share count used in EPS is not simply the current number of shares. It's the weighted average that accounts for changes throughout the reporting period.

Why Weighted Average?

Shares outstanding change during the year due to:

• New share issuances (equity offerings, acquisitions)
• Share repurchases (buybacks)
• Stock option exercises
• Stock splits or reverse splits

The weighted average ensures shares are counted proportionally to the time they were outstanding.

Where to Find Share Count Data

• Balance sheet: Shows end-of-period shares
• Notes to financial statements: Details share changes
• EPS calculation note: Often provides weighted average directly
• Statement of shareholders' equity: Shows all share activity

How to Calculate Weighted Average

For each period with a constant share count:

1. Determine the share count
2. Determine the fraction of the year
3. Multiply shares by time fraction
4. Sum all weighted amounts

Example: Annual Weighted Average

Company XYZ's share activity:

• January 1: 20,000,000 shares outstanding
• April 1: Issued 4,000,000 new shares (total: 24,000,000)
• October 1: Repurchased 2,000,000 shares (total: 22,000,000)
• December 31: 22,000,000 shares outstanding

Calculation:

• Jan-Mar (3 months): 20,000,000 x (3/12) = 5,000,000
• Apr-Sep (6 months): 24,000,000 x (6/12) = 12,000,000
• Oct-Dec (3 months): 22,000,000 x (3/12) = 5,500,000
• Weighted Average: 5,000,000 + 12,000,000 + 5,500,000 = 22,500,000 shares

Stock Split Adjustment

If a stock split occurs, retroactively adjust all prior share counts. For a 2-for-1 split mid-year:

• Pre-split shares: multiply by 2
• Post-split shares: use actual count

Step 4: Calculate Basic EPS

With all components identified, apply the basic EPS formula:

Example Calculation

Using Company XYZ's data:

• Net Income: $67,500,000
• Preferred Dividends: $2,500,000
• Weighted Average Shares: 22,500,000

Company XYZ's basic EPS is $2.89 per share.

Quarterly EPS Calculation

For quarterly EPS, use that quarter's net income, preferred dividends, and weighted average shares for that quarter specifically.

Example quarterly calculation:

• Q3 Net Income: $18,000,000
• Q3 Preferred Dividends: $625,000
• Q3 Weighted Average Shares: 23,000,000

Step 5: Identify Dilutive Securities

For diluted EPS, you need to identify securities that could become common shares. These include:

Stock Options and Warrants

Look for disclosures about:

• Employee stock options
• Stock appreciation rights
• Warrants issued to investors

Find the number outstanding, exercise prices, and weighted average exercise price in the stock compensation notes.

Restricted Stock Units (RSUs)

RSUs convert to common stock when they vest. Find outstanding RSUs in compensation disclosures.

Convertible Securities

Review notes for:

• Convertible bonds (face value, interest rate, conversion ratio)
• Convertible preferred stock (dividend rate, conversion ratio)

Where to Find This Information

• Notes to financial statements
• Stock-based compensation section
• Long-term debt section (for convertibles)
• Equity section
• EPS calculation footnote (often provides summary)

Step 6: Calculate Dilutive Shares from Options

Stock options use the treasury stock method to determine net dilution.

The Treasury Stock Method

1. Assume all in-the-money options are exercised
2. Calculate proceeds received (options x exercise price)
3. Assume proceeds buy back shares at average stock price
4. Net dilution = shares issued - shares repurchased

Example

Company XYZ option data:

• Options outstanding: 3,000,000
• Weighted average exercise price: $20
• Average stock price during period: $40

Calculation:

• Shares if exercised: 3,000,000
• Proceeds: 3,000,000 x $20 = $60,000,000
• Shares repurchased: $60,000,000 / $40 = 1,500,000
• Net dilutive shares: 3,000,000 - 1,500,000 = 1,500,000

Or using the shortcut formula:

Net dilutive = 3,000,000 x ($40 - $20) / $40 = 3,000,000 x 0.5 = 1,500,000

Out-of-the-Money Options

If the exercise price exceeds the stock price, options are out-of-the-money and excluded from diluted EPS (they're anti-dilutive).

Step 7: Calculate Dilution from Convertible Securities

Convertible bonds and preferred stock require additional steps because converting them also affects the numerator (income).

Convertible Bonds

If convertible bonds are dilutive:

1. Add back after-tax interest to the numerator
2. Add conversion shares to the denominator

After-tax interest = Interest expense x (1 - Tax rate)

Example: Convertible Bond

Company XYZ convertible bond data:

• Face value: $50,000,000
• Interest rate: 4%
• Annual interest: $2,000,000
• Tax rate: 25%
• Converts to: 2,000,000 shares

After-tax interest: $2,000,000 x (1 - 0.25) = $1,500,000

Check if dilutive by calculating incremental EPS:

Incremental EPS = $1,500,000 / 2,000,000 = $0.75

If basic EPS is $2.89 and incremental EPS is $0.75, the bonds ARE dilutive (because $0.75 < $2.89).

Convertible Preferred Stock

If convertible preferred is dilutive:

1. Add back preferred dividends to the numerator
2. Add conversion shares to the denominator

Then test if dilutive by comparing incremental EPS to basic EPS.

Step 8: Calculate Diluted EPS

Combine all dilutive elements to calculate diluted EPS:

Complete Example

Company XYZ diluted EPS calculation:

Adjusted Numerator:

• Net income: $67,500,000
• Less preferred dividends: $2,500,000
• Plus convertible bond interest (after-tax): $1,500,000
• Adjusted net income: $66,500,000

Adjusted Denominator:

• Weighted average shares: 22,500,000
• Plus option dilution: 1,500,000
• Plus convertible bond shares: 2,000,000
• Plus RSUs: 500,000
• Diluted shares: 26,500,000

Verify Results

Compare basic ($2.89) to diluted ($2.51) EPS:

• Diluted is lower than basic: Correct
• Dilution percentage: ($2.89 - $2.51) / $2.89 = 13.1%

Step 9: Verify Your Calculation

After calculating EPS, verify your results against the company's reported figures.

Compare to Reported EPS

Companies report basic and diluted EPS on the income statement. Your calculation should closely match. Small differences may occur due to:

• Rounding in share counts
• Precise timing of share issuances
• Contingent shares or complex securities

Review the EPS Footnote

The EPS calculation note in financial statements provides:

• Exact numerator and denominator used
• Reconciliation from basic to diluted shares
• Anti-dilutive securities excluded

Compare your components to the company's disclosed figures to identify any discrepancies.

Reasonableness Check

Ask whether the result makes sense:

• Is the P/E ratio reasonable for the industry?
• Is EPS growth consistent with revenue growth?
• Does the dilution percentage seem right given known options?

Practical Tips for EPS Calculation

These tips will help you calculate EPS more efficiently and accurately.

Use the Right Time Period

• Annual analysis: Use fiscal year figures from the 10-K
• TTM (trailing twelve months): Sum the four most recent quarters
• Quarterly: Use single quarter data from 10-Q

Watch for Stock Splits

Always check for stock splits when comparing EPS across time periods. Financial databases typically show split-adjusted figures, but verify this is the case.

Consider Using Adjusted EPS

For trend analysis, consider calculating adjusted EPS that excludes one-time items like:

• Restructuring charges
• Asset impairments
• Acquisition-related costs
• Legal settlements

Many companies report adjusted EPS alongside GAAP EPS.

Be Consistent

When comparing companies or time periods:

• Use the same EPS type (basic vs. diluted) for both
• Use the same time period (annual, TTM, quarterly)
• Use the same adjustments for both

Leverage Online Calculators

For quick calculations, use our EPS Calculator. Input the values and get instant results. This saves time and reduces calculation errors.

Common EPS Calculation Mistakes

Avoid these frequent errors in EPS calculations.

Using End-of-Period Shares

Always use weighted average shares, not the ending share count. This is the most common mistake and produces incorrect EPS.

Forgetting Preferred Dividends

If preferred stock exists, subtract those dividends. Using total net income overstates EPS available to common shareholders.

Ignoring Treasury Stock Method

Don't simply add all options to the diluted share count. The treasury stock method accounts for proceeds from exercise, resulting in lower net dilution.

Including Anti-Dilutive Securities

Only include securities that reduce EPS. Out-of-the-money options and securities with incremental EPS above basic EPS should be excluded.

Mixing Basic and Diluted

When comparing companies, use the same EPS measure for both. Mixing creates unfair comparisons.

Not Adjusting for Splits

Historical EPS must be split-adjusted for valid comparisons. Check whether data sources have already made these adjustments.

Using Your EPS Calculation

Once you've calculated EPS, apply it to investment analysis.

Calculate P/E Ratio

Compare to industry averages and historical ranges to assess valuation.

Track EPS Growth

Look for consistent positive growth as a quality indicator.

Evaluate Dividend Safety

Lower ratios indicate more sustainable dividends.

Compare to Estimates

Compare your calculated EPS to analyst estimates. Earnings surprises (beating or missing estimates) often drive stock price movements.

Frequently Asked Questions

Calculate EPS Now

Ready to calculate earnings per share? Use our free EPS Calculator to compute both basic and diluted EPS instantly. Enter your data, and the calculator handles all the math, including the treasury stock method for options.

Understanding how to calculate EPS is fundamental for stock analysis. With practice, you'll quickly identify the key figures in financial statements and perform accurate calculations that inform your investment decisions.

EPS Calculation Flowchart

Follow this step-by-step process to calculate EPS from any company's financial statements:

Key Data Points from a 10-K Filing

Quick EPS Reference