# Earnings Per Share - Explained

What are Earnings Per Share?

# What are Earnings Per Share?

Earnings per share (EPS) is an accounting measure. It is calculated by deducting preferred dividends from net income and then dividing that number of outstanding common shares. Preferred shareholders receive preferential payments before common shareholders are paid. When calculating the earnings per share, you are calculating the earnings per share of common stock.

• Note: Most publicly traded companies do not have preferred shares, pursuant to SEC regulations or exchange rules.

Investors who want to invest in equity are interested in company's EPS. The EPS is an indication of a company's profitability. The higher the Earning per Share (EPS), the more equity holders will benefit.

## How to Calculate a Company's Earnings Per Share?

To calculate the EPS of any company, one needs to extract data from balance sheet and income statement. Lets look at how to calculate the Basic Earnings Per Share and the Diluted Earnings Per Share amounts.

## Basic Earnings Per Share

Begin with the income statement. Identify the net income of the company over the relevant fiscal period. Next, determined the amount of preferred dividends paid. This figure can be found on the income statement. You will deduct this amount from the net income figure. Then, identify the weighted average common shares of the company. The weighted average is used, as the number of outstanding company shares will fluctuate over the fiscal period being measured. The number of outstanding shares varies due to stock plans, issuance of new shares, repurchases of shares, and so on. Alternatively, EPS can be calculated by using the number of shares outstanding but the result will not be more accurate. The total or weighted average number of shares can be calculated from balance sheet and income statement. Lastly, divide the net income minute preferred share payments by the weighted average common shares to arrive at the Earnings Per Share amount.

## Diluted EPS

The Basic Earnings per Share uses a simplified capital structure when calculating the EPS. Diluted Earnings per Share (EPS) is slightly more complicated. It requires one to consider warrants, preferred stocks, convertible bonds, and stock options in calculating the total outstanding common shares. These types of instruments are included, as they can be converted into common stock at some point in the future (if so desired). Using the diluted securities figure for outstanding share will generally increase the total number of outstanding shares and hence the earning per share (EPS) declines.

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