Earnings per share must be reported on the face of the financial statements or on the notes of the financial statements of an organization. This formula serves as an indicator of a company’s profitability. The formula measures how much of net income can be spread out to the common shareholders. The organization must subtract dividends that are payable to preferred stockholders first since they are given priority to a corporations net income. Earnings per share are usually referred to as basic earnings per share, however if there are convertible debt and stock then diluted earnings per share is calculated.
The formula for earnings per share is:
Net Income - Dividends on Preferred Stock / Average Outstanding Common Shares
Example:
Adequate Disclosure has issued a $300,000 dividend to its preferred stock holders, a $20,000 dividend to its common stockholders, with income before tax of $900,000, a tax rate of 25%, and outstanding shares of 400,000. What is the earnings per share for Adequate Disclosure?
First Step:
Calculate Net Income:
Income before Taxes: $900,000 x (1-.25) = $675,000
Second Step:
$675,000 – $300,000/400,000 = .94 cents per share
Adequate Disclosure’s earning per share is .94 cents per share.