What does the earnings per share (EPS) ratio measure?

The earnings per share (EPS) ratio measures the profitability allocated to each share of common stock, effectively indicating how much profit a company makes for each share outstanding. This metric is critical for investors as it provides insight into a company's profitability on a per-share basis, allowing for comparisons across companies and time periods. A higher EPS indicates that the company is generating more profit for its shareholders, which can be a factor in investment decisions.

EPS is commonly calculated by taking the net income of a company, subtracting any preferred dividends, and then dividing that figure by the weighted average number of shares outstanding during a specific period. This focus on common shares reflects the return specifically to equity investors, differentiating it from other financial metrics that might assess overall corporate performance without this per-share context.