Earning per share, also called net income per share, measures the amount of net income earned per share of stock outstanding. In other words, this is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year.
Earnings per share is also a calculation that shows how profitable a company is on a shareholder basis. So a larger company’s profits per share can be compared to smaller company’s profits per share. Obviously, this calculation is heavily influenced on how many shares are outstanding. Thus, a larger company will have to split its earning among many more shares of stock compared to a smaller company.
Earnings per share or basic earnings per share is calculated by subtracting preferred dividends from net income and dividing by the weighted average common shares outstanding.
You’ll notice that the preferred dividends are removed from net income in the earnings per share calculation. This is because EPS only measures the income available to common stockholders. Preferred dividends are set-aside for the preferred shareholders and can’t belong to the common shareholders.
Most of the time earning per share is calculated for year-end financial statements. Since companies often issue new stock and buy back treasury stock throughout the year, the weighted average common shares are used in the calculation. The weighted average common shares outstanding is can be simplified by adding the beginning and ending outstanding shares and dividing by two.
Since under the Income Statement the Net Income is in “All numbers in thousands” basis, we must remember to convert the W. Avg Common Shares to become ‘in thousands’ basis as well.
(See above for explanation why 7.99B became 7.99M in calculation)
- Comparable against all companies
- Manipulative (There are 5 types of EPS – Based on type of ‘earnings’ used to calculate)
- Can be distorted by one-off gains
There are many types of EPS being used and investors need to know what the EPS numbers they see represent and determine whether they are a good representation of a company’s earnings. A stock may look like a great value because it has a low P/E, but that ratio may be based on assumptions which, upon further research, you might not agree with
Read more: The 5 Types Of Earnings Per Share