Finance Formulas

Financial Statement Analysis

core

Basic Earnings per Share

Builds onNet Profit Margin — if this page feels steep, start there.

EPS=NI−Dprefweighted-average common sharesEPS = \frac{NI - D_{pref}}{\text{weighted-average common shares}}

Reading the notation

NINI
net income: the year's total profit
DprefD_{pref}
preferred dividends: paid ahead of common shareholders, so removed first
NI−DprefNI - D_{pref}
earnings actually available to common shareholders
weighted-avg shares\text{weighted-avg shares}
the share count averaged over time outstanding during the year
EPSEPS
one share's claim on the year's earnings, in dollars

Why it must be true

Net income belongs to the company; EPS answers what each common share can claim of it. Two adjustments make the division honest. First, preferred shareholders stand in line ahead of common — their dividends must be paid out of net income before common shareholders own anything, so subtract them. Second, the share count changed during the year: shares issued in October only diluted the pot for a quarter, so shares are weighted by the time they were outstanding.

EPS matters because the market prices shares, not companies: it is the E in the P/E ratio, the number earnings announcements beat or miss, and the bridge between corporate profit and what one share is worth.

The derivation

Split the year's profit by seniority. Preferred gets its contractual dividend first; the residual belongs to common:

earnings available to common=NI−Dpref\text{earnings available to common} = NI - D_{pref}

Divide by the shares that actually shared the year — each block of shares weighted by the fraction of the year it was outstanding:

EPS=NI−Dpref∑i(sharesi×fraction of yeari)EPS = \frac{NI - D_{pref}}{\sum_i (\text{shares}_i \times \text{fraction of year}_i)}

Diluted EPS goes one step further and pretends every option and convertible has already exercised — same logic, more pessimistic denominator.

When to reach for it

Converting company-level profit into a per-share figure — for P/E ratios, earnings announcements, or comparing profitability across differently-sized share bases.

Listen for

“earnings per share / basic EPS”“preferred dividends of …”“weighted-average shares outstanding”“net income available to common shareholders”

Back-of-the-envelope

Estimate it in your head first — then the calculator only confirms.

  • ≈

    Numerator first, always: NI minus preferred dividends. With clean numbers (e.g. 96m over 40m shares) the division is often exact — CFA answer choices usually are.

  • ≈

    Scale check: US large-cap EPS mostly lands between $1 and $15. An answer of $0.04 or $400 signals a millions-vs-units slip in the share count.

  • ≈

    Buyback intuition: fewer shares, same earnings → EPS rises with no operating change. If the question mentions a mid-year buyback, expect the weighted count to be below the year-start count.

Traps in applying it

  • ✗Forgetting to subtract preferred dividends — common shareholders only own what's left after the senior claim.
  • ✗Using year-end share count instead of the weighted average — a December issuance barely dilutes the year, but the year-end count pretends it diluted all of it.
  • ✗Subtracting COMMON dividends from the numerator — EPS measures earnings available, whether or not they were paid out.

Limits & criticisms

EPS is the most managed number in accounting: buybacks raise it without creating a dollar of value, and one-off gains flow straight through. Basic EPS also ignores dilution waiting in the wings — options and convertibles — which is why diluted EPS exists and is the analyst's default. Per-share growth can mask flat company-level earnings spread over a shrinking share count; read the two together.

Where it came from

EPS has been the headline number of quarterly reporting since the mid-20th century — standardized precisely because managers computed it flatteringly: APB Opinion 15 (1969), and later FASB's SFAS 128 (1997) with its IFRS twin IAS 33, pinned down the weighted-average denominator and the basic/diluted split candidates learn today. Wall Street's entire "beat or miss by a penny" theater runs on this formula, and per-share compounding of EPS is how buyback programs are judged.

One identity, 1 questions

The exam can hide any variable. Each face below is the same equation solved for a different unknown — drill them separately.

One share's claim

EPS=NI−Dprefweighted sharesEPS = \frac{NI - D_{pref}}{\text{weighted shares}}

The market-facing face: the E that meets the P in every P/E ratio — company profit translated into a single share's language.

Drill this face →

On the BA II Plus

Worked example: Net income $330.00m; preferred dividends $10.00m; weighted-average common shares 110m. Compute basic earnings per share.

  1. 1.330 [−] 10 [=]earnings available to common
  2. 2.[÷] 110 [=]per weighted-average share

→ $2.91

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