What Is Earnings Per Share (EPS)? Basic, Diluted and Adjusted EPS Explained

Earnings per share (EPS) is a company's profit for a period that belongs to its common shareholders, divided by the average number of its shares outstanding.

EPS is the last line of an income statement and the denominator of the price-to-earnings ratio, which makes it one of the most quoted numbers in company reporting. This page covers how basic EPS is calculated and why it uses an average share count, what diluted EPS adds, a worked example from Microsoft's 10-K for the year to June 2026, why companies also publish an adjusted EPS and what the SEC requires when they do, why quarterly EPS does not add up to the annual figure, and where Kresmion shows it. It is descriptive throughout.

How basic EPS is calculated

Basic EPS has a numerator and a denominator.

• The numerator is net income attributable to the common shareholders. For a company with preferred stock, the preferred dividends come out first, because that part of the profit belongs to the preferred holders. For a group with subsidiaries it is the parent's share of profit, after the part that belongs to minority owners of those subsidiaries.
• The denominator is the weighted average number of common shares outstanding during the period, not the count on the last day. A company that bought back shares through the year had fewer shares at the end than at the start, and the average reflects how long each share was outstanding.

The international standard, IAS 33, sets out the principles for both parts and requires basic and diluted EPS to be presented with equal prominence in the statement of comprehensive income, or in the separate income statement where one is presented. US GAAP covers the same ground in the FASB's Topic 260. One adjustment applies in both: after a stock split, the share counts of earlier periods are restated, so EPS stays comparable from year to year instead of halving overnight.

What diluted EPS adds

Many companies have issued instruments that could become common shares later: employee stock options and stock awards, convertible bonds, warrants. Diluted EPS asks what EPS would be if those potential shares were outstanding. It adds them to the denominator, and for a convertible it also adds back to the numerator the after-tax interest, or the preferred dividends, that would no longer be paid.

Microsoft's 10-K describes its own method: diluted EPS is computed on the weighted average shares plus the effect of dilutive potential common shares, using the treasury stock method, and its potential shares are outstanding stock options and stock awards. The treasury stock method assumes that the cash holders would pay to exercise options, and for options and stock awards alike the compensation cost not yet recognised, is used to buy back shares at the period's average market price, so only the net new shares count.

Potential shares that would raise EPS, or shrink a loss per share, are left out as anti-dilutive. That is why a company reporting a loss usually shows the same basic and diluted figure: adding shares to a loss would make the loss per share look smaller.

A worked example: Microsoft, fiscal 2026

Microsoft's fiscal year ends on 30 June. Its 10-K for the year ended 30 June 2026, filed on 29 July 2026, shows the calculation in Note 2:

The arithmetic checks: 133,749 divided by 7,429 is 18.00, and divided by 7,453 it is 17.95. Dilution cost five cents a share on the reported figures in fiscal 2026 because the stock awards add 24 million shares to a base of 7,429 million. Note 2's net income available for common shareholders equals net income, so nothing comes off the numerator; Microsoft has no preferred stock outstanding. The note also says anti-dilutive awards left out of the calculation were immaterial.

GAAP EPS and adjusted EPS

The figures above are GAAP EPS: computed under US GAAP, the accounting standards US public companies report under, and printed on the income statement. Many companies also publish an adjusted, or non-GAAP, EPS that removes items management considers outside the ordinary run of the business.

Microsoft does this in the same 10-K. Its management discussion shows adjusted diluted EPS of $17.28 for fiscal 2026 against GAAP diluted EPS of $17.95. The difference is $0.67 a share, after tax, of net gains from its investments in OpenAI, which the 10-K says primarily relate to a dilution gain from the OpenAI recapitalization. In fiscal 2025 the adjustment went the other way: the OpenAI line was a net loss, so adjusted diluted EPS of $14.13 sat above GAAP diluted EPS of $13.64. An adjustment can raise or lower the number, depending on which items a company excludes.

The SEC sets the rules for showing such a figure. Regulation G requires a company that publicly discloses a non-GAAP measure to present with it the most directly comparable GAAP measure and a quantitative reconciliation between the two, and Item 10(e) of Regulation S-K requires that, in SEC filings, including earnings releases furnished on Form 8-K, the GAAP measure be presented with equal or greater prominence. Which items to exclude is a company's choice, so adjusted EPS from two companies may not be built the same way.

Why quarterly EPS does not add up to the year

Each quarter's EPS divides that quarter's profit by that quarter's average share count. The annual figure divides the year's profit by the year's average share count. So the quarters need not sum to the year, for three reasons: the share count moves when a company buys back or issues shares, each figure is rounded to the cent, and in a quarter with a loss the potential shares are left out as anti-dilutive while the full-year figure may include them.

Microsoft's diluted EPS for the first three quarters of fiscal 2026 was $3.72, $5.16 and $4.27, from its 10-Q filings. Those add up to $13.15, while the third-quarter 10-Q reports $13.14 for the nine months as a whole. Here the one-cent gap is almost all rounding, because Microsoft's share count barely moved; at a company with large buybacks, new issuance or a loss quarter the gap can be much wider. There is no 10-Q for the fourth quarter, because the 10-K covers it. Subtracting the three quarters from the annual $17.95 gives an approximation of fourth-quarter EPS, not the figure itself, for the same reasons.

Where Kresmion shows EPS

On a company's page in Kresmion's app, open with a free account, the Financials tab carries basic EPS, diluted EPS and the weighted diluted share count in the income statement, annual or quarterly, from the XBRL data in the company's SEC filings. Per-share figures and share counts cannot be added or subtracted across periods, so in the quarterly view a fourth quarter the company never filed on its own stays blank rather than being derived. The figures are GAAP figures from the statements; company-defined adjusted EPS is not among the lines shown. The P/E ratio built on EPS is covered in what the P/E ratio is.

In Kresmion's spreadsheet, also with a free account, the KRM.FIN function returns the same numbers in a cell: =KRM.FIN("MSFT","eps_diluted","FY2026") for Microsoft's diluted EPS in fiscal 2026. The guide lists the items and periods it accepts. A trailing twelve month period returns an error for EPS rather than a sum of four quarters, for the reason above.

What EPS does not tell you

• It depends on the share count as much as on profit. A buyback raises EPS with no change in profit, and new share issuance lowers it.
• It carries every one-off item in GAAP form. Gains on investments, write-downs and legal settlements all pass through net income, as Microsoft's OpenAI line shows.
• It is not cash. EPS is built on accrual accounting, and profit can differ from the cash a business brings in over the same period, which the cash flow statement reports.
• It does not compare across share prices on its own. An EPS of $18 says nothing about value without the price paid for each share, which is what the P/E ratio adds.
• Adjusted figures are not standardised. Each company chooses its own exclusions, within the SEC's reconciliation rules.

Key takeaways

Frequently asked questions

What is the difference between basic and diluted EPS?

Basic EPS divides profit by the common shares actually outstanding, on average, during the period. Diluted EPS also counts the shares that stock options, stock awards, warrants and convertible securities could create, so it is the same or lower whenever the company is profitable.

What is a good EPS?

There is no good level on its own, because EPS depends on how many shares a company has. A company with fewer shares shows a larger EPS from the same profit. EPS is read against the same company's earlier periods and against the share price, which is what the P/E ratio does.

Why is adjusted EPS different from GAAP EPS?

Adjusted EPS removes items a company chooses to exclude, such as investment gains or losses, restructuring costs or acquisition charges. GAAP EPS includes everything that passes through net income. The SEC requires a company that publishes an adjusted figure to show the GAAP figure and a reconciliation between them.

Can EPS be negative?

Yes. A company with a net loss reports a negative EPS, often called a loss per share. Potential shares from options and convertibles are normally left out of the diluted figure in that case, because adding them would make the loss per share look smaller.

Does a rising EPS mean a stock will go up?

No. EPS describes past profit per share. It does not say what investors will pay for that profit later, and it can rise through buybacks or one-off gains without any change in the underlying business.

This page is information, not investment advice.

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Source: Microsoft Corporation, Form 10-K for the fiscal year ended 30 June 2026, filed 29 July 2026: Note 2 (Earnings per share), the Item 7 overview table and non-GAAP reconciliation, https://www.sec.gov/Archives/edgar/data/789019/000119312526323660/msft-20260630.htm ; quarterly and nine-month diluted EPS from Microsoft's fiscal 2026 Form 10-Q filings (filed 29 October 2025, 28 January 2026 and 29 April 2026), SEC XBRL company facts, https://data.sec.gov/api/xbrl/companyfacts/CIK0000789019.json ; IFRS Foundation, IAS 33 Earnings per Share, https://www.ifrs.org/issued-standards/list-of-standards/ias-33-earnings-per-share/ ; Regulation G, 17 CFR 244.100, https://www.ecfr.gov/current/title-17/section-244.100 ; Regulation S-K Item 10(e), 17 CFR 229.10, https://www.ecfr.gov/current/title-17/section-229.10 , applied to furnished earnings releases by Form 8-K Item 2.02, Instruction 2, https://www.sec.gov/files/form8-k.pdf ; Kresmion Financials tab and KRM.FIN spreadsheet function.

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