3.2.2. Earnings per Share
Earnings per share (EPS) is a closely watched measure of a company’s profitability. EPS expresses the amount of a company’s profit allocated to each outstanding share of its common stock. There are several different ways to calculate EPS, but the basic equation is:
Dividends paid to preferred stockholders are normally deducted from net income before calculating EPS. Often this is done for you on the income statement, but not always. The fact that EPS specifically measures the earnings associated with common shares, as opposed to both common and preferred, will be important later.
EPS is usually calculated on an LTM basis. This may be calculated using the company’s most recent 10-K, along with any subsequent 10-Qs. The number of 10-Qs the company has filed since its most recent 10-K is equal to the number of quarters you should disregard from the 10-K. Thus, if EPS is being calculated at the end of the first quarter, drop the first-quarter earnings from the 10-K and instead use the earnings from the newly filed 10-Q. In other words, earnings from the first quarter of the current year and the last three quarters of the previous year would be used. If EPS is being calculated at the end of the year, the net income for the entire year will be used. To express this as a formula:
LTM earnings = earnings from current 10-K + earnings from n 10-Qs – earnings from earliest n quarters of 10-K
Shares outstanding would be the average number of common shares outstanding during the same period.
Example Question
Dithering Dan’s Emporium had net income during the first quarter of $3.1 million. It had total net income for the previous year of $10.2 million and net income of $2.3 million in the first quarter of last year. At the beginning of the second quarter of last year, there were 77 million shares outstanding. At the end of the first quarter of this year, there were 78 million shares outstanding. What is D