Earnings per share

100_2975Earnings per share is perhaps the most followed accounting figure by investors.  It is so important that they refer to it as “the bottom line.”

Earnings per share (“EPS”) is calculated by dividing a company’s net income by the average number of common shares outstanding during the period.  The resulting number represents how profitable a single share of stock was last period.

For example, as of this writing, Buffalo Wild Wings reported $2.75 earnings per share in 2011.*  If you held 1,000 shares of Buffalo, $2,750 of the company’s earnings is associated with your stock.**

Many companies report basic and diluted EPS.  Basic EPS is calculated as I explained above.  Diluted EPS is calculated as if certain stock options are exercised, or other events happen that will dilute, or water down, your stock.  When analyzing stocks, you should use diluted EPS, rather than basic.

Buffalo Wild Wings has some stock options outstanding that could be converted into stock.  If these were converted, Buffalo would then have more shares outstanding (18,483,000 shares, to be exact), lowering its EPS to $2.73/share.  Buffalo’s Diluted EPS is $2.73.

Don’t confuse EPS with dividends.  Net income (and EPS) are not necessarily distributed as cash to investors.

Buffalo Wild Wings did not pay any dividends last year.  Therefore, even though the company’s earnings per share was $2.73, investors did not actually receive any of that money.

Companies that issue preferred stock would subtract preferred stock dividends from earnings when calculating EPS.

—–

*Calculated as follows: Net income = $50,246,000; Weighted average shares outstanding = 18,337,000; 50,246,000/18,337,000 = $2.75.

** $2.75 x 1000 shares = $2,750.

[Image: 100_2975 by abbamouse, on Flickr]

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

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