3.5. Net Income and EPS
Lesson objective
Understand total profit and the amount attributable to each share.
Net Income includes operating results, interest, taxes, and other items. It may contain one-time gains or losses, so the quality of earnings should be reviewed.
EPS divides profit attributable to common shareholders by the average number of shares. Basic EPS and Diluted EPS use different denominators. Diluted EPS considers instruments that may increase the share count.
Repurchases can increase EPS even when total profit does not change. New share issuance and stock-based compensation can create dilution.
Net income belongs to shareholders; EPS expresses it per share
Basic EPS
EPS = (Net income − Preferred dividends) ÷ Weighted-average common shares
Diluted EPS also considers the potential effect of dilutive securities such as certain options or convertibles.
Share-count effect
Net income rises from $100M to $105M (+5%), but diluted shares fall from 100M to 90M. EPS rises from $1.00 to about $1.17 (+17%). EPS grew much faster because the share count changed.
Bridge: Revenue → Operating income → Interest/other → Taxes → Net income → Share count → EPS
A tax benefit, asset sale, dilution, or buyback can move EPS without the core business changing by the same amount.
Essential terms
| Term | Practical meaning | |---|---| | Basic EPS | Earnings per share using the basic weighted-average share count. | | Diluted EPS | Includes potential dilution from options and other instruments. | | Dilution | An increase in shares that reduces existing owners' percentage interest. |
In Finzati
Finzati displays EPS, earnings surprises, and shares outstanding.
What you should remember
- Review both total profit and profit per share.
- Identify nonrecurring items.
Practice
Compare Net Income growth with EPS growth and explain any difference.