Earnings per share

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Earnings per share (EPS) are the earnings returned on the initial investment amount.

Earning Per Share decides how much of a company's profit is alloted to the Companies outstanding stocks. So its like if you have earnings for a company they divide it by number of shares available in that comnpany to find out how much its earned per share.

The Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.

The EPS formula does not include preferred dividends for categories outside of continuing operations and net income as shown here. This formula also shows the most basic formula for earnings per share.

\mbox{Earnings Per Share}=\frac{\mbox{Profit}}{\mbox{Weighted Average Common Shares}}

The EPS formula is shown here for Net Income and Continuing Operations (substitute income from continuing operations for net income).

\mbox{Earnings Per Share}=\frac{\mbox{Net Income-Preferred Dividends}}{\mbox{Weighted Average Common Shares}}

Note: Only dividends actually declared in the current year are subtracted. The exception is when preferred shares are cumulative, in which case annual dividends are deducted regardless of whether they have been declared or not. Dividends in arrears are not relevant when calculating EPS.

Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS. Remember that preferred stock rights have precedence over common stock. If preferred dividends total $100,000, then that is money not available to distribute to each share of common stock.

The value used for company earnings can either be the last twelve months' Net income (referred to as trailing twelve months, or ttm), or analysts' predictions for the next twelve months' net income (referred to as forward).

The number of shares used for the calculation can either be basic (only shares that are currently outstanding) or Diluted EPS (includes all shares that could potentially enter the market).

Companies often use a weighted average of shares outstanding over the reporting term. (The weight refers to the time period covered by each share level) EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). Note that last year's EPS would be actual, while current year and forward year EPS would be estimates.


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