What is Earnings Per Share? | Business Terms

When you're looking at an income statement, all the way down at the bottom you're going to see net income. Net income is our bottom line, that's how profitable our company is. But after that you may see earnings per share. Whether it's basic earnings per share and/or diluted earnings per share.

Let's go back to what just earnings per share is. Earnings per share takes net income divided by the number of shares outstanding. Why do we use earnings per share? Earnings per share is one of the ways that we look at valuing our stock price. So generally if we're growing earnings per share, our stock price is going to grow with our earnings per share.

Now there are two types of earnings per share, there's basic earnings per share and there's diluted earnings per share. Basic earnings per share takes all the shares that are currently owned by investors. So net income divided by all of those shares, we call them basic common shares. Diluted earnings per share takes all of those basic shares that are currently owned by investors and adds what we call convertibles.

We’d say that 95/99% of the time when someone is just talking about earnings per share, we're talking about diluted earnings per share because it's a more conservative view of earnings per share.

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