What does earnings per share (EPS) measure?

Earnings per share (EPS) specifically measures the profit allocated to each share of common stock. It is calculated by taking the net income of the company, minus any dividends on preferred stock, and then dividing that amount by the weighted average number of shares outstanding during the period. This metric is crucial for investors as it indicates how much profit is attributable to each individual share, thus allowing for a clear comparison of profitability on a per-share basis.

This measurement is particularly valuable because it provides insight into a company's financial performance over a given period, facilitating assessments of profitability relative to other companies. Investors often use EPS as a basis for their investment decisions, looking for companies with higher EPS values as indicators of better financial health and potential growth.

The other choices presented do not accurately represent what EPS measures. While total profit, dividends paid, and increases in retained earnings are all important financial metrics, they do not focus on the profit allocated specifically to individual shares, which is the essence of EPS.