How do you calculate earnings per share (EPS) from financial statements?

Earnings per share (EPS) is a key financial metric that represents the portion of a company's profit attributable to each outstanding share of common stock. It's an important indicator for investors, as it helps assess a company's profitability on a per-share basis. EPS is calculated using information from a company's income statement and the number of outstanding shares. Here's how to calculate EPS:

Basic EPS Formula:

Basic EPS is calculated using the following formula:

$\text{Basic EPS} = \frac{\text{Net Income - Preferred Dividends}}{\text{Weighted Average Number of Common Shares Outstanding}}$

Let's break down each component of the formula:

1. Net Income: This is the company's total profit after deducting all expenses, taxes, and interest. It is usually found at the bottom of the income statement.

2. Preferred Dividends: If the company has preferred stock, you need to subtract the preferred dividends from net income. Preferred dividends are the dividends paid to preferred stockholders. They are subtracted because they represent a portion of the earnings that doesn't belong to common shareholders.

3. Weighted Average Number of Common Shares Outstanding: To calculate EPS accurately, you need the weighted average number of common shares outstanding during the reporting period. The "weighted average" accounts for any changes in the number of shares throughout the period. This information is typically disclosed in the company's financial statements or footnotes.

Diluted EPS:

Diluted EPS takes into account the potential impact of dilutive securities, such as stock options, convertible bonds, or preferred stock that could be converted into common shares. The formula for diluted EPS is as follows:

$\text{Diluted EPS} = \frac{\text{Net Income - Preferred Dividends}}{\text{Weighted Average Number of Common Shares Outstanding} + \text{Dilutive Securities}}$

Dilutive securities are those that, if converted into common shares, would reduce EPS. To calculate diluted EPS, you need to consider the potential impact of these securities on the number of common shares outstanding.

Here are the steps to calculate EPS:

1. Obtain the company's income statement, which includes net income and preferred dividends (if applicable).

2. Determine the weighted average number of common shares outstanding during the reporting period. This information can typically be found in the company's financial statements or footnotes.

3. Calculate EPS using the appropriate formula (basic or diluted) based on the information gathered in steps 1 and 2.

4. Report the calculated EPS figure in financial reports and disclosures, as it is a critical metric for investors and analysts.

It's important to note that EPS is just one of many financial metrics used to assess a company's performance. Investors often consider EPS in conjunction with other financial ratios and indicators to get a comprehensive view of a company's financial health and profitability. Additionally, EPS can vary from one reporting period to another, so it's important to analyze trends and consider the context when interpreting EPS figures.

EPS = Net income / Number of outstanding shares