If you follow stocks and the market, one figure you’ll see mentioned all the time is EPS. Earnings per share tells you about the profitability of a company in a way that’s particularly useful to investors trying to judge whether to buy or sell individual stocks.
EPS is a company’s net earnings (i.e., net profits) for a given time period divided by the number of shares of its stock outstanding. For example, if XYZ Corporation made $100, and there are 100 shares of its stock, the company’s earnings per share is $1.
EPS figures can be represented over different time periods. A very common figure known as trailing EPS, for example, is calculated using the company’s net earnings for the previous 12 months.
It’s also important to know what is included in the number of shares. Basic EPS is determined using so-called “free float,” or the number of active company shares in the market. Diluted EPS, on the other hand, is determined using free float plus convertible instruments, such as stock options granted to employees that may become common shares in the future. Because it typically includes more shares, diluted EPS usually will be lower than basic EPS.