Earnings Per Share Formula, Ratio – EPS Calculation Calculation

Earning per share ratio does provide the amount of net profit remaining to each share of common stock.

The Earning per Share formula (EPS formula) used is as follows:

EPS = (Net Income – Preferred Stock Dividends ) / Average Number of Outstanding Common Shares

In the above EPS calculation average number of outstanding common shares is used since it might change over the period of time for which this ratio is being calculated. Preferred stock dividends are removed from the calculation dues to the fact that they are not available to common stockholders.

This Earning per share ratio is very important since it does serve as an indication while determining share price. Since this is a ratio, it provides better view on profitability per share comparing different businesses. There might be two businesses with the same level of net profit, however when comparing these profits to number of common shares it might appear that one business is able to generate more profits for one share outstanding comparing to the other business. This also allows to compare businesses which are different is size.

On the other hands it is essential to understand that EPS ratio is based on net profit which is based on certain accounting principles and assumptions applied. Therefore for investors it is essential to use this ratio carefully and also take into account other financial data and financial ratios.

Of course, the higher Earning per share ratio is the better, which means that the business earns higher profits per one common share.

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