In stock-market analysis, what does earnings per share measure?

In stock-market analysis, earnings per share measures profit per outstanding share. It is generally calculated by dividing profit available to common shareholders by the weighted-average number of common shares outstanding during a period.

The numerator often starts with net income and subtracts dividends on preferred stock, because basic EPS focuses on earnings attributable to common shareholders. The denominator uses a weighted average so that shares issued or repurchased during the period are counted for the portion of the period they were outstanding.

Diluted EPS also considers instruments that could create additional common shares, such as stock options, convertible bonds, and convertible preferred stock. Because those possible shares can reduce the result, diluted EPS is normally no higher than basic EPS.

EPS is useful for comparing a company’s profitability over time, but it is not the same as cash flow. Accounting choices, buybacks, unusual gains, and share dilution can all affect EPS.