EPS is net income, minus preferred dividends, divided by shares outstanding.
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Subtract preferred dividends from net income, then divide by the number of common shares outstanding. A company with $1,000,000 in net income, $100,000 in preferred dividends and 900,000 common shares has an EPS of $900,000 divided by 900,000 shares, or exactly $1.00 per share.
Preferred dividends come out first because preferred shareholders have a priority claim on profit ahead of common shareholders. Skipping that subtraction overstates how much profit is actually attributable to each common share.
EPS on its own is an absolute dollar figure, so a $1.00 EPS means very different things for a $10 stock and a $500 stock. Investors usually pair EPS with the share price to compute the price-to-earnings ratio, which shows how many dollars the market is willing to pay for each dollar of annual earnings.
Basic EPS, the version this calculator produces, uses actual shares outstanding. Diluted EPS goes a step further and adds in shares that could be created from stock options, warrants and convertible securities, which is why diluted EPS is usually slightly lower than basic EPS for companies with those instruments outstanding.
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