Perhaps the most widely cited number in corporate financial reports is earnings per share (EPS). EPS focuses on the common stock and indicates the portion of total company income that is applicable to a single share of common stock. The reporting of EPS depends upon whether the firm has a simple or a complex capital structure. A simple capital structure includes no “potential” common equity securities other than common stock outstanding. A complex capital structure includes, in addition to common stock, other securities or agreements that represent potential issues of common stock. Examples of potential issues of common stock include outstanding stock options as well as convertible bonds and convertible preferred stocks. Firms with a simple capital structure report a measure of basic EPS, and firms with a complex capital structure report measures of basic and diluted EPS. The calculations of basic and diluted EPS are explained and illustrated below.
Types of Earnings Per Share