What are earnings per share?

Earnings per share is a part of a company's profit which is allocated to an individual outstanding share of common stock. As viewed by the investor, it is the rate of earnings which are returned on the original investment made. Also known as EPS for short, the earnings per share can be used to indicate a corporation's financial profitability.

In the United States, companies are required by the Financial Accounting Standards Board to report earnings per share in regards to every major section of their income statements. These are sections such as: net income, extraordinary items, continuing operations, and discounted operations. Requirements in other countries and jurisdictions may vary.

Earnings per share calculation

There are different methods of calculating EPS. One of the common ways to calculate is by using the net income formula, which is as follows:

Net Income - Preferred Stock Dividends / Weighted Average Outstanding Common Shares

When subtracting preferred dividends, only those declared during the present year are removed, unless the preferred shares are cumulative in nature. In that situation, annual dividends from them would be subtracted whether or not they were declared.

Other methods that may be used include ones such as basic formula, using profit, and the continuing operations formula, using income derived from such continuing operations.

Earnings per share is a fairly quick method which does not include many variables in its calculation. For instance, some fields have higher margins than others. Companies in the lower profit margin industries may have low earnings per share, yet still be extremely competitive in that sense within their own respective industries. Additionally, several companies may have the same EPS ratio, yet all come to it with different amounts of capital.

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