Everything you need to know about Earnings per Share:
What are Earnings per Share?
• Earnings per share refers to the amount of earnings per each outstanding share of a public corporation’s stock; in the United States, the Financial Accounting Standards Board requires all publicly-traded companies to produce income statements that account for earnings per share for all major categories outlined in the income statement. As a result, all publicly traded companies, in the United States of America, are required to report their earnings per share for their continuing operations, their net income, all extraordinary items on the income sheet and discontinued operations.
• Earnings per share refers to the portion of a company’s profit that is allocated to each outstanding share of common stock. When calculating a company’s earnings per share, it is better to use a weighted average number of shares outstanding because the number of outstanding shares can fluctuate over time.
How do Companies Calculate Earnings per Share?
• The earnings per share formula are different for each report; in general, the earnings per share formula will not include preferred dividends for variables outside of net income and continued operations.
• In a basic sense, the earnings per share formula will look as such:
o Earnings Per Share= Profit/ Weighted Average Common Shares
• For calculating the earnings per share of the firm’s net income, the formula will look as such:
o Earnings Per Share= Net Income-All dividends on Preferred Stock/ Average number of outstanding shares
• The earnings per share formula for continuing operations will look as such:
o Earnings Per Share= Income from Continuing Operations/Weighted Average of Common Shares
• The Earnings per Share formula will only include dividends that were actually declared (by shareholders) in the current year. In this case, all declared dividends are subtracted from the earnings per share formula. The exception to this rule is when preferred shares are cumulative, in which case all annual dividends are deducted regardless of their declaration status. Furthermore, dividends in arrears are not relevant when calculating earnings per share.