Explanation :Earnings per share is the amount of earning or net income that can be allocated to each outstanding common stock share. Make a note that only common stock is used for the calculation of earnings per share. Preferred stock is not taken into consideration. Preferred dividends are however taken into consideration because these reduce the amount of money available to common stock shareholders. Think about it like this. If the company paid all of its expenses and preferred dividends, the remaining money left would be earnings that could be split up amongst the common stock shareholders because all the other company obligations have been taken care of. Earnings per share is the total dollar amount of earnings that can be given to each common stock after preferred dividends are paid. Remember, preferred stock dividends are generally paid before common stock dividends. This is one of the advantages of owning preferred stock. This is how you calculate basic earnings per share.
In a nutshell:
- Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding.
- EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.