Definition
Earnings per share is the portion of a company's net profit that belongs to each ordinary share. It converts total profit into a per-share figure so that results can be compared with the share price and across periods.
How it works
Basic EPS divides profit attributable to ordinary shareholders, after preferred dividends, by the weighted average number of shares in issue during the period. Diluted EPS also counts shares that could be created by options, warrants or convertible securities, giving a more cautious figure.
EPS can rise because profit grows or because buybacks reduce the share count, and one-off gains, write-downs and accounting choices can distort it. It is the denominator of the P/E ratio and is reported in the company's reporting currency, which may differ from the currency the share trades in.
Formula / convention
EPS = (Net income − Preferred dividends) ÷ Weighted average ordinary shares outstanding
Illustrative example
Illustration with fictional figures: a company reports net income of HK$450 million and pays HK$50 million of preferred dividends, leaving HK$400 million for ordinary shareholders; with a weighted average of 200 million ordinary shares, EPS is HK$400 million ÷ 200 million = HK$2.00. If a buyback cut the share count to 160 million with the same profit, EPS would be HK$400 million ÷ 160 million = HK$2.50, a 25% rise without any extra profit.
What to watch for
EPS can be lifted by buybacks, one-off gains or accounting changes without any improvement in the business, so growth in EPS should be checked against cash flow and the quality of earnings. EPS reported under different accounting standards is not always directly comparable.