The earnings per share, or EPS, of a company typically represents the amount of profit the company generates for each share of common stock it has issued. However, investors may want to calculate the EPS using pretax income to eliminate variations in tax obligations between different companies or from year to year in the same company. For example, if the government lowered taxes on corporations, the pretax EPS would be a better measurement of a company's performance from one year to the next than the after-tax EPS.
1. Add the company's income tax liability for the year to its net profit to find the company's pretax profit for the year. For example, if the company's net profit equals $9 million and the company paid $1 million in taxes, the company's pretax profit equals $10 million.
2. Subtract the required preferred stock dividends the company must pay from the pretax earnings. In this example, if the company must pay $2 million to preferred shareholders, the company has $8 million of pretax income available to common shareholders.
3. Divide the pretax income available to common shareholders by the number of common shares outstanding to find the pretax earnings per share. Finishing the example, if the company has 2 million shares outstanding, divide $8 million by 2 million to find the company has a pretax EPS of $4 per share.
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