Certified Management Accountant Practice Exam 2025 - Free CMA Practice Questions and Study Guide

The formula for calculating earnings per share (EPS) is net income divided by the number of stock shares outstanding. This metric is crucial because it represents the portion of a company's profit that is allocated to each share of common stock, providing investors with an essential measure of a company's profitability on a per-share basis.

By using net income, which reflects the total profits of the company after all expenses, taxes, and costs are subtracted, and then dividing by the number of shares that are currently held by shareholders, EPS gives a clear insight into how effectively a company is generating profit relative to its outstanding shares.

This calculation can help investors make comparisons across different companies in the same industry or assess how a company's profit is changing over time as it grows or declines in its operations. Consequently, it is a vital tool for assessing a company’s financial health and performance from the perspective of shareholders.