The formula for Earnings per Share is:
Earnings per Share = (Net Income – Preferred Stock Dividends) / Average Common Shares Outstanding
Earnings per Share represent how much investors earn on their investment of common stocks in a company. This is important to investors as the only reason they are investing is to make money. The formula is rather tricky to use. Note that Preferred Stock Dividends must be subtracted from Net Income. This number is then divided by the Average Common Shares Outstanding. To determine the average: Take the number of stock outstanding at the beginning of the year and add the number of stock outstanding at the end of the year. This figure is then divided by 2 to arrive at the average value.
