Earnings per share, what it is and how to calculate the EPS index

For those of you who are involved in finance and trading, you have probably heard of the EPS index, also known as earnings per share, a calculation that is useful for various purposes. But what does “earnings per share” mean? What does the acronym EPS stand for? In the fundamental analysis of a company, earnings per share is an essential indicator to define the state of health of the company.

In fact, it represents an element through which you can evaluate the profitability and performance of a publicly traded company. As the markets have evolved, fully understanding the meaning and application of EPS has become even more crucial for investors, analysts and industry professionals. After all, earnings per share not only reflect a company’s ability to generate profits per share (as per its name), but also offers a perspective on its competitive position in the current market.

Here, then, in detail what it is, how it is calculated and how it is used the earnings per share (earnings per share, EPS) and why it is so important in the financial market.

What is earnings per share: meaning and definition of the EPS index

Earnings per share (EPS) is a financial indicator that measures the portion of net income attributable to each ordinary share in circulation. It is an essential tool for investors because it provides a clear measure of the company’s profitability on a per-share basis.

In simple terms, EPS helps to understand how much profit the company is able to generate for each share held by shareholders.

EPS is reported in company financial statements and is governed by international accounting standards such as IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles).

This indicator can be calculated in different variations.

• Basic earnings per share: indicator that results from dividing the net profit available to ordinary shareholders by the weighted average of ordinary shares in circulation during the year. In this way, possible variations in the number of shares in circulation are taken into account.
• Diluted earnings per share: the ordinary shares taken as a reference are an estimate based on the effect of exercise and the possible conversion of the securities.
• Adjusted EPS: Some companies report adjusted EPS to exclude extraordinary or non-recurring items, providing a more accurate measure of operating profitability.

What is earnings per share and how is it used?

EPS is one of the most commonly used indicators by investors to evaluate a company’s profitability.

A high EPS suggests that the company is generating significant profits per share, which can make it more attractive to investors.

However, it is essential to put EPS into context within the industry and compare it to similar companies to obtain an accurate assessment.

In addition to providing a direct measure of profitability, EPS is often used in the calculation of other key financial indicators, such as the price-to-earnings ratio (P/E Ratio). The P/E ratio is calculated by dividing the current stock price by the EPS and provides an indication of how much investors are willing to pay per unit of the company’s profit. A high P/E may indicate expectations of future growth, while a low P/E may suggest that the company is undervalued or facing challenges in generating profits.

It is important to note that EPS alone does not provide a complete view of a company’s financial health. For example, two companies may have the same EPS, but one may have achieved it through extraordinary transactions or asset sales, while the other may have achieved it through sustainable core operations. Therefore, investors should analyze EPS in combination with other financial and qualitative metrics to get a complete assessment.

Today, with the increased focus on sustainable and responsible business practices, investors are starting to consider non-financial metrics along with EPS. For example, integrating environmental, social and governance (ESG) factors into financial analysis is becoming common practice, reflecting a broader - in some ways holistic - view of corporate value.

Earnings per share (EPS): the formula for the calculation

EPS is calculated by subtracting preferred dividends from net income and dividing the difference by the average number of shares issued and outstanding.

For the calculation, it is more accurate to use the average number of shares outstanding during the reporting period, because the number of shares outstanding can change over time. However, some data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

So, the basic formula for calculating EPS is:

• EPS = (Net Income − Preferred Dividends) / Weighted Average Number of Common Shares Outstanding

Where:

• Net Income: the company’s total profit after subtracting all operating expenses, taxes, interest, and other costs;
• Preferred Dividends: payments made to preferred shareholders, who have priority over common shareholders in the distribution of dividends;
• Weighted Average Number of Common Shares Outstanding: the weighted average number of common shares outstanding during a given period, taking into account any issuances or repurchases of shares.

Earnings per share: some examples to understand

Let’s say a company has a net income of 25 million. If the company pays 1 million in preferred dividends and has 10 million shares in the first half of the year and 15,000 shares in the other half, the EPS will be 1.92 (24 / 12.5).
First, 1 million is subtracted from the company’s net income, obtaining 24 million dollars; then the weighted average is calculated to find the number of shares outstanding for the entire year (0.5 x 10m + 0.5 x 15m = 12.5).

Let’s look at the formula together with another concrete example. If a company has a net income of €10 million, pays €1 million in dividends on preferred stock, and has a weighted average of 5 million common shares outstanding, the EPS would be:

• EPS = 10,000,000 − 1,000,000 / 5,000,000 = €1.8 per share

But why, instead, it might be limited to use only the EPS index to make a comparison and evaluate an investment? An important aspect of EPS that is often ignored is the capital required to generate the earnings (net income) in the calculation.

Two companies could generate the same amount of earnings per share. One company could do this by cutting investment even though it may be more efficient at using its capital to generate more income. Only when the metrics of the two companies are similar can one company be considered "better" than the other. Again, it is useful to provide an example.

Let’s imagine two companies in the technology sector:

• Company X: net income of €50 million and 10 million shares outstanding → EPS = €5
• Company Y: net income of €20 million and 5 million shares outstanding → EPS = €4

Based on EPS alone, Company X seems more profitable. However, other metrics such as the P/E ratio and revenue growth should be compared for a more complete assessment.

Optimal EPS ratio values

There is no absolute value of EPS that is considered "optimal", as this depends on various factors such as the sector, the growth phase of the company and the macroeconomic conditions. However, some general criteria can help to assess whether an EPS is positive or not.

A EPS that is growing steadily is generally a good sign, as it indicates that the company is increasing its profits over time.

For example, according to the annual report of Standard & Poor’s (2025), companies in the S&P 500 with an EPS that averages 10% growth per year have performed better than those with stagnant EPS.

In addition, it is important to compare the EPS with that of competitors to have an industry reference. A company with an EPS that is lower than its competitors could indicate management inefficiency or difficulty in maintaining profitability.

Finally, a very high EPS may not always be positive if it is not supported by sustainable growth. For example, a company that drastically reduces costs to increase EPS could jeopardize its future development. For this reason, investors should always analyze EPS, as mentioned several times, in combination with other financial indicators to obtain a more complete view of the financial health of a company.

Original article published on Money.it Italy. Original title: Utile per azione, cos’è e come si calcola l’indice EPS