Basic Earnings Per Share (EPS) is a financial measurement of a company’s profit compared to its outstanding shares of common stock. EPS is reported on a company’s income statement and is a valuable metric for investors when the company has only issued common stock to finance its business operations. EPS is used to determine the Price-to-Equity (P/E) Ratio, which is frequently used by investors for valuing shares of a company.

Basic Earnings Per Share (EPS) = (Net income - Preferred Dividends) / Weighted Average Outstanding Shares The weighted average of outstanding shares is preferred because a static number of outstanding shares may be difficult to determine at a given point in time. Companies frequently issue new shares, and a weighted average can account for the wide range in shares outstanding. Importantly, dividends to preferred shareholders are subtracted from the company’s net income before calculating EPS, which will lower EPS.

When the company has received other forms of debt or equity to finance growth, EPS becomes a less accurate measurement of the profitability of the company. That is because capital from outside investors may dilute earnings and lower EPS.