Earnings per Share Ratio

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Description: The earnings per share ratio measures the amount of a company's net income that is theoretically available for payment to the holders of its common stock. A company with a high earnings per share ratio is capable of generating a significant dividend for investors, or it may plow the funds back into its business for more growth; in either case, a high ratio indicates a potentially worthwhile investment, depending on the market price of the stock.

It is very worthwhile to track a company's earnings per share ratio on a trend line. If the trend is positive, then the company is either generating an increasing amount of earnings or buying back its stock.

Formula: Subtract any dividend payments due to the holders of preferred stock from net income after tax, and divide by the average number of common shares outstanding during the measurement period. The calculation is:

Net income after tax - Preferred stock dividends
Average number of common shares outstanding

Example: ABC Company has net income after tax of $1,000,000 and also must pay out $200,000 in preferred dividends. It has both bought back and sold its own stock during the measurement period; the weighted average number of common shares outstanding during the period was 400,000 shares. ABC's earnings per share ratio is:

$1,000,000 Net income - $200,000 Preferred stock dividends
400,000 Common shares

= $2.00 per share