Knowing What Earnings Per Share Is

By definition, Earnings per Share (EPS), is the net income of a business after dividing income tax that is previously subtracted with any preferred dividends, with the outstanding common stock’s weighted average number of shares during the same business period.

In general, businesses that are publicly owned report two earnings per share figures, unless simple capital structure is provided for by them. Most publicly owned companies, however, have complex capital structures that may require them to report two earnings per share figures, namely the basic and diluted earnings per share. The basic earnings per share is based on the number of outstanding stock shares while the diluted earnings per share are based on outstanding shares as well as shares that may possibly be issued in future time in the form of stock options. As a general rule mandated by the GAAP or Generally Accepted Accounting Principles, publicly owned businesses should report in their income statements their earnings per share report below the net income line. This financial statistic is highly relevant to a company's investors or stockholders. Earnings per share gives business investors a means of knowing how much amount the company has earned on stock share investments. Simply put, earnings per share provides investors what they need to know about their investments, ranging from how much net income the company has earned for every stock share that they own and many more.

Determining the earnings per share is especially important for stockholders and investors alike in order for them to know how much the business has earned in its net income on a per share basis. That way, they can be able to compare it with the price of their shares in the market. In getting the earnings per share, the net income is divided by the total number of capital stock share. On the other hand, privately owned companies no longer have to report earnings per share because their stockholders normally tend to lean more on the business’s total net income.

Computing for, or determining the formula for earnings per share, as in the case of publicly owned companies, can be a difficult process. For one, the accountant has to make necessary adjustments in the earnings per share formula if changes in the business occur or if needed be. Also, a company might issue additional stock shares at the same time buy some of its own shares for the given period. The company might also issue different kinds of stock, which can result to a division of the net income into two or multiple pools, with one pool for every stock classification. Other events such as acquisition, merger or divestiture can blow the formula for earnings per share as well.