A distilled and important income figure, calculated as net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding (WACSO). Companies must disclose earnings per share on the face of the income statement. In another words earnings per share is nothing but the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Earnings per share indicates the income earned by each share of common stock. Thus, companies report earnings per share only for common stock.
Calculation of Earnings Per Share
The computation of earnings per share for a simple capital structure is different from the computationg of earnings per share for a complex capital structure. In a simple capital structure the computation for earnings per share involves two items (other than net income)—(1) preferred stock dividends and (2) weighted-average number of shares outstanding. On the other hand the computation of earnings per share for a complex capital structure includes both basic and diluted earnings per share. In order to compute the earnings per share of a company, the type of the capital structure of the company must be indicated: whether simple or complex.
Basic Earnings Per Share
The earnings per share for a simple capital structure is basic earnings per share. If the capital structure of the company is simple then the word basic would not be necessary. The calculation of basic earnings per share is simpley stated as:
EPS= (Net Income - Preferred Dividends) ÷ Weighted Average Shares Outstanding
Diluted Earnings Per Share
The earnings per share for a complex capital structure is diluted earnings pe share. Diluted EPS begins with the basic EPS computation, but includes the effect of all potential dilutive common shares outstanding during the period. It is computed as income available to common stockholders divided by weighted average shares outstanding, plus the impact of convertibles, options, warrants, and other dilutive securities. The calculation of diluted earnings per share is simply stated as:EPS= (Net Income - Preferred Dividends) ÷ Weighted Average Shares Outstanding - Impact of Convertibles - Impact of Options, Warrants, and Other Dilutive Securities
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