does eps include preferred stock?

Short answer: Preferred stock is generally not counted in the EPS denominator for common-share EPS; instead preferred dividends are subtracted from net income to arrive at income available to commo...

2026-01-22 11:04:00

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Short answer

Preferred stock and its effect on reported earnings-per-share are common questions for investors and accounting learners. does eps include preferred stock? In brief: preferred stock itself is not included in the denominator for basic EPS that measures earnings per common share; rather, preferred dividends are typically subtracted from net income to compute income available to common shareholders. The precise accounting depends on whether the preferred shares are cumulative, noncumulative, convertible, participating, or redeemable.

Background: what is Earnings Per Share (EPS)?

Earnings per share (EPS) is a per‑share profitability metric that shows how much of a company’s net income is attributable to one common share. There are two standard EPS measures:

Basic EPS: net income less preferred dividends divided by the weighted average number of common shares outstanding during the period. This shows actual earnings attributable to existing common shareholders.
Diluted EPS: adjusts the numerator and denominator to reflect the potential effect of convertible securities, options, warrants, and other instruments that could increase the number of common shares. Diluted EPS shows the “worst‑case” (most conservative) per‑share earnings if all dilutive securities were converted into common stock.

General formulas (common presentation):

Basic EPS = (Net income – Preferred dividends) / Weighted average common shares outstanding
Diluted EPS = (Adjusted net income) / (Weighted average common shares outstanding + Dilutive common equivalents)

EPS focuses on common shareholders because ordinary/common shares typically absorb residual claims on earnings and assets after preferred shareholders are satisfied. That focus determines how preferred stock affects both numerator and denominator.

How preferred stock affects the EPS numerator

When calculating EPS, the numerator used for both basic and, typically, diluted EPS is income available to common shareholders. To reach that figure, net income is adjusted by subtracting dividends that are attributable to preferred shareholders. Key points:

Preferred dividends reduce the numerator. If a company reports net income of $X, and it pays or is contractually obligated to pay preferred dividends of $Y, then income available to common shareholders is $X − $Y for basic EPS purposes.
Cumulative vs. noncumulative: for cumulative preferred stock, required dividends are deducted from net income even if not declared or paid in the period; the obligation accrues and is considered in EPS calculations. For noncumulative preferred stock, only dividends actually declared during the period are deducted.
Convertible preferred: for basic EPS, convertible preferred dividends are deducted (as the instruments are still preferred). For diluted EPS, if conversion is assumed under the if‑converted method and the conversion is dilutive, preferred dividends that would be eliminated on conversion are added back to the numerator when calculating diluted EPS (because after conversion those dividends would no longer be paid).

Illustrative GAAP/IFRS practice (summary):

Under US GAAP (ASC 260) and IFRS, the starting point for basic EPS is net income attributable to common shareholders, which requires deducting preferred dividends.
If a preferred security is cumulative, the accrued amount is treated as a deduction even if unpaid. If noncumulative, only declared amounts are deducted.

Preferred stock and the EPS denominator

Preferred shares are not counted as common shares in the denominator for basic EPS. The denominator for basic EPS includes only the weighted average number of common shares outstanding during the reporting period. Preferred shares are a separate class with priority claims and therefore are excluded from the basic common‑share count.

However, preferred shares can appear indirectly in the diluted EPS denominator under specific conditions:

Convertible preferred stock: if conversion into common shares is assumed under the if‑converted method and that conversion is dilutive (i.e., it reduces EPS), the potential common shares from conversion are added to the denominator for diluted EPS.
Participating securities (two‑class method): if preferred shares have participation rights in undistributed earnings, the two‑class method requires allocating earnings between classes and determining EPS per class. That allocation can affect the denominator logic because earnings are split across classes rather than simply subtracting a fixed dividend.

Types of preferred stock and specific EPS treatments

Cumulative preferred stock

Treatment: Required dividends on cumulative preferred stock are deducted from net income when calculating income available to common shareholders whether or not the dividends were declared or paid during the period. The rationale is that cumulative preferred dividends represent a contractual obligation to preferred holders that affects residual earnings available to common shareholders.
EPS effect: Reduces the numerator by the accrued preferred dividend amount. The denominator remains common shares only (unless conversion assumed for diluted EPS).

Noncumulative preferred stock

Treatment: Only dividends actually declared during the period are deducted from net income for EPS calculations. If the board does not declare a dividend on noncumulative preferred stock for the period, nothing is subtracted for that period.
EPS effect: Numerator reduced only when dividends are declared. Denominator remains common shares for basic EPS.

Convertible preferred stock

Treatment for basic EPS: Convertible preferred shares remain preferred and their dividends are deducted from net income when computing income available to common shareholders.
Treatment for diluted EPS: Under the if‑converted method, assume convertible preferred are converted into common shares at the beginning of the period (or at issuance date). If the assumed conversion is dilutive (i.e., it lowers EPS), then:
- Add back to the numerator any preferred dividends that would no longer be paid after conversion (because converted shares would be common shares and not receive preferred dividends).
- Add the incremental common shares from assumed conversion to the denominator.
EPS effect: Convertible preferred can reduce basic EPS via their dividend deduction, but they can also reduce diluted EPS further if conversion would increase the share count sufficiently to be dilutive.

Participating preferred stock (two‑class method)

Participating securities share in undistributed earnings beyond fixed dividends. Common examples include preferreds that receive their stated dividend and also participate pro rata in additional earnings with common shareholders.
Two‑class method: When a company has participating securities, it may need to allocate net income between common and participating securities based on their rights to dividends and participation. Under this method, earnings are allocated first to classes with fixed rights (stated dividends), and then the remaining earnings are allocated on the participation ratio to each class. EPS for common shareholders is computed on the allocated portion of earnings to common.
EPS effect: The numerator available to common shareholders can be smaller than simply net income less fixed preferred dividends because participating preferred may receive a share of residual earnings; therefore, common EPS can be materially impacted.

Redeemable or temporary‑equity preferred stock

Some preferred shares are redeemable at a fixed date or under specified conditions and may be presented as temporary equity rather than permanent equity. Accounting standards have particular presentation and measurement rules for such instruments.
EPS implications: If preferred stock is classified as temporary equity or liability, companies must consider whether any deemed dividends or measurement adjustments affect the numerator for EPS. In some cases, the carrying amount and any difference recognized may influence how earnings are attributed among claimants.

Basic EPS vs. Diluted EPS: how preferred securities can dilute EPS

Conceptual difference

Basic EPS measures per‑share earnings using the actual common shares outstanding and subtracts preferred dividends to get income attributable to common shareholders.
Diluted EPS reflects the potential dilutive effect of all convertible instruments (convertible preferred, convertible debt), options, warrants, and other instruments that could increase the number of common shares. The diluted measure attempts to show a lower EPS that would result if all dilutive instruments were converted into common stock.

Typical adjustments used in diluted EPS calculations

If‑converted method: Used for convertible securities (including convertible preferred). Assume conversion occurs at the beginning of the period (or at issuance). Add back preferred dividends to the numerator (because converted securities wouldn’t receive them) and add the assumed common shares from conversion to the denominator.
Treasury‑stock method: Used for options and warrants. Assume the holders exercise options/warrants, and the issuer uses proceeds to repurchase common shares at the average market price during the period. Add the net incremental shares to the denominator.

When convertible preferred is anti‑dilutive (i.e., conversion would increase EPS), companies exclude it from diluted EPS. Only securities that reduce EPS are included in diluted EPS.

Presentation and disclosure requirements (US GAAP / IFRS highlights)

Key disclosure and presentation rules require clear reporting of basic and diluted EPS and transparent disclosures about securities that affect EPS. Highlights include:

US GAAP (ASC 260) requires separate presentation of basic and diluted EPS on the face of the income statement for continuing operations and net income (or loss). A reconciliation should show how the numerator and denominator were adjusted to obtain diluted EPS.
Companies must disclose the amounts of preferred dividends deducted from net income (including cumulative dividends accrued but unpaid) and the impact of convertible and other dilutive instruments.
IFRS requires similar disclosures, including reconciliation of numerator and denominator, and information about participating and potentially dilutive securities. IFRS uses terms and methods that align materially with ASC 260 for EPS calculations.
For participating securities, the method of allocation (e.g., two‑class method) and the amounts allocated to each class should be disclosed.

As of 2026-01-22,据 Deloitte 报道，guidance and common practice continue to emphasize clear reconciliation of EPS computations and explicit disclosure of instruments that could affect EPS (including preferred dividends and conversion features).

Worked numerical examples

The following simplified examples illustrate the common treatments. Numbers are illustrative only and do not reflect any specific company.

Example 1 — Basic EPS with preferred dividends deducted

Net income: $1,200,000
Preferred dividends (nonconvertible, cumulative, accrued for period): $200,000
Weighted average common shares outstanding: 2,000,000

Basic EPS = (Net income − Preferred dividends) / Weighted avg common shares Basic EPS = ($1,200,000 − $200,000) / 2,000,000 = $1,000,000 / 2,000,000 = $0.50 per common share

This shows the preferred dividend reduces the numerator and thereby reduces EPS available to common shareholders.

Example 2 — Diluted EPS when convertible preferred are treated as converted

Assume the same company also has convertible preferred stock with terms as follows:

Convertible preferred shares outstanding: effectively convertible into 500,000 common shares
Preferred dividends on those convertible preferred: $50,000 for the period

If conversion is assumed (if‑converted method), the preferred dividends of $50,000 would be added back to the numerator (because converted shares would no longer receive the preferred dividend) and 500,000 shares would be added to the denominator. Using the earlier net income and other preferred dividend:

Adjusted numerator for diluted EPS = Net income − Nonconvertible preferred dividends + Convertible preferred dividends added back Adjusted numerator = $1,200,000 − $200,000 + $50,000 = $1,050,000 Adjusted denominator = Weighted avg common shares + Shares from conversion = 2,000,000 + 500,000 = 2,500,000

Diluted EPS = $1,050,000 / 2,500,000 = $0.42 per share

Compare basic EPS $0.50 vs diluted EPS $0.42: conversion is dilutive.

Example 3 — Two‑class method for participating preferred (illustrative)

Assume:

Net income: $1,000,000
Preferred fixed dividend: $100,000 (paid)
Preferred and common shares participate pro rata in remaining earnings after fixed dividends. Participation ratio: preferred 20,000 shares; common 1,000,000 shares (so participation is small for preferred).

Step 1: Subtract fixed preferred dividend: Remaining earnings = $1,000,000 − $100,000 = $900,000

Step 2: Allocate remaining earnings by participation ratio. Total participating shares = 20,000 (preferred) + 1,000,000 (common) = 1,020,000

Preferred share of remaining earnings = 20,000 / 1,020,000 × $900,000 ≈ $17,647
Common share of remaining earnings = 1,000,000 / 1,020,000 × $900,000 ≈ $882,353

Step 3: Total allocated to common = common share of remaining earnings = $882,353 Total per common share EPS = $882,353 / 1,000,000 ≈ $0.882 per common share

Under the two‑class method, the presence of participating preferred reduces the straightforward subtraction approach and requires allocation of earnings between classes, which changes the numerator attributable to common shareholders.

Common misconceptions and FAQs

Q: Do preferred shares appear in the EPS denominator? A: For basic EPS, no—preferred shares are not included in the common‑share denominator. For diluted EPS, convertible preferred may be included in the denominator if assumed conversion is dilutive.

Q: Are unpaid cumulative dividends ignored in EPS? A: No. Unpaid cumulative preferred dividends are typically deducted from net income when computing income available to common shareholders, even if not paid during the period.

Q: Does the deduction of preferred dividends depend on whether dividends were declared? A: Yes — for noncumulative preferred stock the deduction occurs only when dividends are declared. For cumulative preferred, accrued (required) dividends are deducted even if not declared.

Q: If preferred dividends are added back in diluted EPS, does that overstate earnings? A: No. The mechanics are intended to reflect the hypothetical scenario where convertible preferred are converted into common shares — in that scenario, the issuer would not pay preferred dividends, so adding them back is appropriate. Diluted EPS shows the per‑share result under that conversion assumption.

Q: Can participating preferred cause a bigger reduction in common EPS than fixed preferred dividends? A: Yes. Participating features can allocate additional earnings to preferred holders beyond fixed dividends, which reduces the share of earnings available to common shareholders.

Implications for investors and analysts

Understanding how preferred stock affects EPS is important for valuation and comparative analysis. Practical implications include:

EPS comparability: Companies with significant preferred dividends will report lower basic EPS for common shareholders. Analysts should always check the numerator adjustments and preferred dividend amounts when comparing EPS across firms.
Dilution risk: Convertible preferred represent a source of potential dilution. Analysts should look at both basic and diluted EPS, and the company’s disclosures about conversion terms and potential share issuance.
P/E ratios and valuation: Because preferred dividends lower net income available to common shareholders, reported EPS and derived P/E ratios can be materially different for companies with heavy preferred issuance. Investors should adjust or read disclosures to ensure apples‑to‑apples comparisons.
Participating securities: These complicate straightforward EPS calculations and require allocation rules; an investor should read footnotes to understand how earnings were allocated and whether reported EPS reflects a two‑class allocation.

Investors should read the footnotes and EPS reconciliation in financial statements. Key items to check: amounts of preferred dividends (declared vs accrued), number of convertible preferred shares and conversion ratios, participation features, and whether any preferred stock is classified as temporary equity or redeemable.