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 Operating Leverage vs Financial Leverage
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Earnings Per Share Formula – Flow of the article
Earnings per Share Formula
In simple terms, earnings per share formula denote how much of net income each share has earned during the year.
Here’s the EPS Formula–
Explanation of Earnings per Share Formula
In this EPS formula, there are two parts.
 In the numerator, we are deducting the preferred dividends from net income. We are deducting the preferred dividends from net income because this ratio is only a measure of common shares.
 In the denominator, we will take a weighted average of common outstanding shares and divide the difference between the net income and preferred dividend. In the denominator also, we will only include common shares (not shareholders’ equity) and that’s why there would be no preferred shares.
Earnings per share formula and return on equity are an almost similar ratio. The only difference lies in the denominator. In the case of return on equity, we take shareholders’ equity in the denominator; but in earnings per share formula, we only take the average of outstanding common shares.
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Use of Earnings per Share Formula
Every investor invests into a company’s stock mainly for two reasons –
 Firstly, the investors invest in a company’s stock because they expect a handsome dividend from the company.
 Secondly, the investors may see a great growth potential of the company in near future. If the company grows, the share price will also rise and that will only help investors in ensuring a great return on their investments.
For these two reasons, investors use the ratio – earnings per share formula. Using this ratio will help them understand whether a company has a great growth potential and also how much dividend a company may pay to its shareholders in near future.
A higher EPS usually tells the investors that the company has been growing and the financial health of the company is great. A lower EPS, on the other hand, may create doubt in the minds of the investors about the company.
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In many countries, the public companies need to show forth their EPS in the income statement. Usually, the companies record EPS after the net income in the income statement.
Example of Earnings per Share EPS Formula
Let’s take a practical example to illustrate earnings per share formula.
Hit Technology Inc. has the following information –
 The net income for the year end 2017 – $450,000
 The preferred dividends paid in 2017 – $30,000
 At the beginning of the year 2017, the common shares outstanding were 50,000 shares. In the middle of the year, Hit Technology Inc. issued another 40,000 common shares.
Find out the earnings per share of Hit Technology Inc.
In the example, we know the net income and the preferred dividends. That means we know all the information needed for the numerator. However, we don’t know the weighted average of common shares outstanding; because we need to calculate that from the data given.
Let’s calculate the weighted average number of common shares outstanding first.
It’s said that at the beginning of the year the firm had 50,000 common shares. And in the middle, 40,000 new common shares were issued. It means we can consider 50,000 shares for the entire year and 40,000 shares for last 6 months.
Here’s the calculation –
 Weighted average number of common shares = (50,000 * 1) + (40,000 * 0.5) = 50,000 + 20,000 = 70,000 shares.
Now, we will find out the EPS formula –
 EPS formula = (Net Income – Preferred Dividends) / Weighted Average Number of Common Shares
 Or. EPS formula = ($450,000 – $30,000) / 70,000
 Or, EPS = $420,000 / 70,000 = $6 per share.
Earnings per Share Calculator
You can use the following Earnings per Share Calculator
Net Income  
Preferred Dividend  
Weighted Average Number of Shares Outstanding  
Earnings per Share Formula =  
Earnings per Share Formula = 


Earnings per Share in Excel (with excel template)
Let us now do the same example above in Excel. This is very simple. First, you need to find the weighted average number of common shares and you need to provide the two inputs of Net Income and Preferred Dividends.
You can easily calculate the ratio in the template provided.
Let’s calculate the weighted average number of common shares outstanding first.
Now, we will find out the EPS by using the formula –
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This has been a guide to Earnings Per Share formula, its uses along with practical examples. Here we also provide you with EPS Calculator with downloadable excel template.
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