How to Compute Earnings per Share Using Financial Statements

Earnings per share, or EPS, is one of the most important numbers investors and analysts use to gauge a company’s performance. EPS states the amount of profit a company generates during an accounting period for every share of common stock it has outstanding. A growing EPS typically suggests a company’s business is improving. If a company has issued certain financial instruments to investors, called dilutive securities, it reports two separate EPS numbers called basic and diluted EPS. You can calculate both of these EPS figures using a company’s income statement.

Step 1

Locate a company’s income statement in one of its Form 10-Q quarterly reports or Form 10-K annual reports. You can download these reports from the investor relations page of the company’s website or from the U.S. Securities and Exchange Commission’s online EDGAR database.

Step 2

Find net income available to common shareholders, listed toward the bottom of the income statement. This is the earnings available to common stockholders after the company pays dividends to preferred stockholders. If a company has no preferred stock, it reports only net income. In this example, assume the company generated $1 billion in net income available to common shareholders during a quarter.

Step 3

Identify the basic weighted average number of common shares outstanding, listed below net income available to common shareholders. This is the average number of shares the company had outstanding during the period, which accounts for new shares issued and shares repurchased from investors. If the company does not show this number directly on the income statement, find it listed in the footnotes to its financial statements. In this example, assume the company has 250 million basic shares outstanding.

Step 4

Find the diluted weighted average shares outstanding, listed below the basic shares outstanding. Diluted shares outstanding is the total number of shares that would be outstanding if all dilutive securities, such as convertible preferred shares, were converted into common stock. Dilutive securities can potentially increase shares outstanding and reduce EPS. In this example, assume there are 300 million diluted shares outstanding.

Step 5

Divide net income available to common shareholders by the basic weighted average common shares outstanding to compute basic EPS. Continuing the example, divide $1 billion by 250 million to get $4 in basic EPS.

Step 6

Divide net income available to common shareholders by the diluted weighted average common shares outstanding to calculate diluted EPS. Concluding the example, divide $1 billion by 300 million to get $3.33 in diluted EPS. This means that if all dilutive securities were converted to common shares, the company would have generated profit of $3.33 per share during the quarter.

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About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.

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