# How to Calculate Earnings Per Share: Definition & Formula

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Lesson Transcript
Instructor: Tina Van Rikxoord
There are many different numbers that investors look at when deciding whether to invest in a company, including the earnings per share. In this lesson, we will learn what earnings per share means and how to calculate it.

## Earnings Per Share Defined

Earnings per share, also known as EPS, is a very important number in business. It tells shareholders how much money each share of their stock earned for the company. It's important because, usually, when a company has a high earnings per share, it also has a high stock price, which makes investors happy.

The equation for calculating earnings per share is as follows:

Earnings per Share = (Net Income - Preferred Dividends) / Number of Common Shares Outstanding

Net Income

One of the factors used to figure earnings per share is the company's net income. Net income is the profit left over after deducting the company's expenses and is sometimes referred to as net profit or the bottom line. Net income can be found on the company's income statement. We can see this on the following example of an income statement for Bob's Miniatures:

In this example, the net income for Bob's Miniatures is \$122,200.

Preferred Dividends

Preferred dividends are the second item used to calculate earnings per share. Dividends are a share of the profit that is sometimes paid to shareholders. Preferred dividends are dividends paid to the owners of a class of stock called 'preferred' stock. The preferred dividends can be found on the statement of retained earnings (also called the statement of stockholder's equity) or from the income statement. In the following example, Bob's Miniatures is showing \$17,000 and \$32,200 paid for dividends on the retained earnings statement:

Common Shares Outstanding

The final piece of information we need to calculate the earnings per share is the number of common shares outstanding. Common shares are another class of stock. A company usually issues many more shares of common stock than it does of the more expensive preferred stock. Outstanding shares are simply shares that have been bought by stockholders. So, common shares outstanding refers to the number of shares of common stock that have been purchased by stockholders.

Be careful not to confuse shares issued and shares outstanding. Shares issued means the total number of shares the company has offered for sale, while outstanding shares means the number of shares that are owned by stockholders.

To figure out the number of common shares outstanding, we'll usually have to do a little extra math, using the information in the stockholder's equity section of the balance sheet. On the balance sheet, it will tell us how much money the company received for selling common shares, along with how much the shares were sold for. By dividing the total paid for the common stock by the cost per share, we can calculate how many shares are outstanding.

Let's use the information from Bob's Miniatures balance sheet to figure out how many shares of common stock are outstanding:

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