What It Is:

The term earnings per share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

How It Works/Example:

Let's assume that during the fourth quarter, Company XYZ reported net income of $4 million. During the same time frame, the company had a total of 10 million shares outstanding. In this particular case, the company's quarterly earnings per share (or EPS) would be $0.40, calculated as follows:

$4 million/10 million shares = $0.40

Why It Matters:

EPS is a carefully scrutinized metric that is often used as a barometer to gauge a company's profitability per unit of shareholder ownership. As such, EPS is a key driver of share prices. It is also used as the denominator in the frequently cited P/E ratio.

EPS can be calculated via two different methods: basic and fully diluted. Fully diluted EPS -- which factors in the potentially dilutive effects of warrants, stock options, and securities convertible into common stock -- is generally viewed as a more accurate measure and is more commonly cited.

EPS can be further subdivided according to the time period involved. Profitability can be assessed by prior (trailing) earnings, recent (current) earnings, or projected future (forward) earnings. Though EPS is widely considered to be the most popular method of quantifying a firm's profitability, it's important to remember that earnings themselves can often be susceptible to manipulation, accounting changes, and restatements. For that reason, free cash flow is seen by some to be a more reliable indicator than EPS. Nevertheless, EPS remains the industry standard in determining corporate profitability for shareholders.