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Earnings Per Share

The amount of profit assigned to each share of a company’s common stock. To calculate earnings per share, you begin with a company’s net income over a given period of time (quarterly or annual, for instance). Then, you subtract the amount paid in dividends to the company’s preferred stockholders. Finally, the difference between these two numbers is divided by the number of outstanding shares of stock. Since this number is always fluctuating, the calculation could be based either on an average over a given period of time or the number of shares at the time of calculation.

Investors care about earnings per share because they serve as either a return or loss on their investment. When earnings per share are high, stock prices generally go up and investors make money and vice versa. This figure does not give a complete picture of a company’s financial health, however, because it doesn’t account for the company’s debt.

EXAMPLE:

Friend: “You own stock in that company? Weren’t they just rated one of the most unethical corporations in America?”
Investor: “Yes, but their earnings per share went through the roof last quarter.”