How to Calculate Earnings per Share of Common Stock
Earnings per share, as the name indicates, reflects the amount of earning a company has generated with its share holdings (ordinary). This is a very good measure for the investors to gauge the performance of the company. This ratio is one of the most widely used performance measures by investors of stock holdings.
Common stock is normally owned by the founder(s) of the company. The people who started the company own common stocks and venture capitalists normally own preferred stocks. When dividends are declared, the holders are preferred shares get paid first, followed by the common stock holders.
Down below i provide details steps on, how you can determine the earnings per share of common stocks.
To begin with, let’s suppose the net income after the preferred stock have been paid their share of dividends is 100 and the company has a total of 70 outstanding shares, then the earning per share will be 100/70 i.e. $1.428. This is the amount the company was able to generate for its common stock holdings.
Firstly, we will need to find out the net income after taxes and interest have been paid off. To obtain the value, we will simply deduct the interest and the tax payable from our operating profit.
This operating profit is deduced by subtracting all the operating costs/expenses from the gross profit of the company. All the information is available in the financial reports of the company, in the section of income statement or the profit and loss account.
Having determined the income after tax and interest, we need to find out the amount of dividends paid on preferred shares. This is usually a fixed percentage and can be found by reviewing the company policy on shares, or in the notes of the income statement. It is important to see if there are any outstanding dividends for the previous years. If outstanding balances exist, they will be paid before we can move onto the dividends of the common stock. This is due to the cumulative nature of such products. Subtract these dividends paid from the net income calculated in step 2.
We will now find the amount of paid up share capital of the company. These are the shares which the company has sold out to the general public. The information can be extracted from the notes of the balance sheet. Finally, divide this by the amount we calculated in step 3 in order to compute the earnings per share.