How Do You Calculate Earnings Per Share?

Today
we’re going to talk about how to calculate earnings per share. So if we remember
from our other discussions, we’ve got net income at the end of a quarter and of
a year and we’re going to what we’re going to do is we’re going to spread this net
income.

Among
a pool of shareholders, right? So we’ve got all these different shareholders and
we’re going to spread this this net income. We’re not actually going to pay it out.
So it’s just more theoretical practice what we’re doing here, but we’re trying to
get an idea of how this net income would be divided up among the shareholders. What’s
their share? What’s their claim on that? Net income? So let’s go ahead and let’s
get to the formula for how we would go ahead and calculate this so we’ve got net
income. Then we subtract out preferred dividends, right? Because what we want to
get here is we want to get an idea of the amount of net income among the common
shareholders.

How To Solve For Earnings Per
Share

So net
income. We subtract out this this prefer any preferred dividends that are paid or
so and then we going to we’re going to scale everything by the number of common
shares outstanding so it might be a little bit easier to understand it if we have
an example. So let’s say that we have XY YZ Corporation and XYZ Corporation has
let’s say they have net income of $30,000. And then they have preferred dividends.

Preferred
dividends of $4,000 and then shares out say now we’re talking about common shares
so common shares. And again, we take the weighted average of the common shares throughout
the year common shares outstanding. We’ll just assume not come and shares outstanding.

We’ve got 50,000 so now we need to make some calculations here and we’re just going to plug in to our formula up here these numbers. So let’s get started. So we’ve got the numerator. We’re going to have 30,000 this net income. Then we’re going to subtract out the preferred dividends because the common shareholders don’t have any claim on that that goes the preferred shareholders. So now we’re going to divide this whole thing by the number of common shares outstanding not total. Is common shares so we got 30,000 – 4000 divided by fifty thousand and what’s that going to give us that is going to give us? 52 cents a share so one way of thinking about how the earnings these earnings of $30,000.

Taking A Closer Look At Dividends

So one way of thinking about how what share of the pie each shareholder has we can think of it for every share you own you really have a 52 cents a share in those earnings. So now we can think about a couple things are a little more complex in terms of this this these preferred dividends that we’re talking about here. What if the preferred dividends are declared but not paid so the company has declared that they are going to have a preferred dividend but they haven’t yet paid it. Do we go ahead and then deduct it in terms of calculating our earnings per share, even if they haven’t been paid the answer is yes we go ahead and we deduct even if they haven’t been paid yet if they’ve been declared you deduct them. Now what if what if the preferred Dividends are cumulative which I’m going to explain this in another post about preferred dividends, but what if their cumulative but they haven’t been declared do we then deduct them from here? Because again, we’ve got this here. What do we do with the preferred dividends? Well, even if they’re there they haven’t actually been declared but they’re cumulative we go ahead and we deduct them in our calculation of earnings per share as well.

So whether
or not the dividends have actually been paid if they’ve been declared. Aired or
whether or not they haven’t been declared but their cumulative we’re going to go
ahead and we’re going to deduct those preferred dividends from that income scale
everything by the number of common shares outstanding the weighted average throughout
the year and that will yield our earnings per share which in this case was 52 cents
a share.