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Earnings per Share
The earnings per share ratio is a profitability ratio that tells us the amount of profit earned by shareholders on a per share basis. It is the most widely used financial ratio and far more significant the the company's total net earnings.
Interpreting Earnings per Share
- The amount of profit earned per common share
- Excludes any dividends paid to preferred shareholders
Watch Out!
If preferred shares are cumulative, subtract the dividends even if they are not paid in the current year.
Only the current year's dividends should be included in the calculation, do not include any dividends in arrears.
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Example: Earnings per Share
Compute and interpret the earnings per share ratio using the following information:
- Net income: $785,000
- Dividends paid: $135,000 (Common: $75,000; Preferred: $60,000)
- $20,000 of the preferred dividends paid were for dividends in arrears
- Outstanding common shares January 1st, 2020: 525,000
- Outstanding common shares December 31st, 2020: 575,000
Practice: Earnings per Share
Compute the earnings per ratio using the following information:
- Total revenue: $1,500,000
- Total expenses: $800,000
- Common dividends: $85,000
- Outstanding common shares, beginning: 1,200,000
- Outstanding common shares, ending: 1,750,000
- Number of cumulative preferred shares: 50,000
- Preferred share dividend: $0.50/share
- There are 2 years of dividends in arrears
Do not round your work and round your final answer to 2 decimal places.