Financial Analysis: Earnings per share (EPS) Example

Earnings per share is the amount of net income earned for each share of common stock outstanding. EPS is the most widely quoted of all the financial ratios. It’s the only ratio that appears on the financial statements, and that is on the income statement. Earnings per share is a measure of profitability. Recall that outstanding shares of stock are shares issued minus shares of treasury stock. Earnings per share is calculated as net income, minus preferred stock dividends, divided by average number of common stock shares outstanding.

So here’s an income statement from our sample company. We’ll use the highlighted net income to determine the earnings per share. Here is a balance sheet from our sample company. We’ll use the highlighted common stock section to figure out the shares outstanding. Sometimes we aren’t given the number of shares outstanding, like in my example. But it’s easy enough to figure out if we have the value of the stock and the par value. The number of shares equals the value of common stock divided by the par value. For 2016, net income minus preferred stock dividends, which I’ve assumed to be $100 for this example, divided by average common shares outstanding, gives us an earnings per share of $1.71. This result is often compared to others in the industry, as well as what stock market analysts predicted.

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