Earnings per share (EPS) can serve two slightly different purposes: to reveal the amount of money a company earns per share of stock outstanding, or to reveal the amount of earnings which can be attributed to each share of common stock. When analyzing big-picture EPS, investors do not need to know the amount of preferred dividends paid out. To calculate the narrower common-stock-based metric, however, you must subtract preferred dividends, since dividends on preferred stock effectively reduce the amount of earnings that can be attributed to each share of common stock. Understanding the variables required for a basic EPS calculation, as well as the basic EPS formula, is a must for all investors.
Net earnings, otherwise known as net income, represent the money left over after all direct and indirect costs have been taken into account. Publicly-traded corporations report their earnings on a quarterly basis, and investors eagerly await earnings reports to inform their trading strategies. Net earnings can be taken from the final line item of the income statement, which corporations also file and make available to the public on a regular basis.
The number of shares outstanding is the second variable required to calculate EPS. Corporations authorize a certain number of shares to be sold in their corporate charters, but companies do not necessarily issue the full amount of authorized shares at once. Corporations may choose to put limited numbers of shares in the marketplace from time to time, and may buy shares back from the market to influence stock prices. The number of shares outstanding may remain the same between quarters, or it may change just as often as earnings numbers. Check a company's most recent quarterly report or company stats on your preferred stock news website to determine the current number of shares outstanding.
Divide the net income by the number of shares outstanding to calculate basic earnings per share, for all shares of stock outstanding. As mentioned, this EPS valuation is useful for analyzing all shares of stock outstanding, not just common stock shares.
The version of the EPS formula that includes preferred dividends is less effective in conveying how much a company earns per share of stock outstanding, and is more effective for showing the earnings that can be pegged to each share of common stock. Since common stock represents only one of two types of issued stock, this type of EPS calculation can be more limited in terms of overall company valuation, and more practically useful when analyzing common stock values. Subtract the preferred dividends from the net profit after tax and divide that amount by the number of common shares outstanding to calculate EPS for common shares only.
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