How is Earnings per Share calculated?

Earnings per Share (EPS) is a key financial metric that measures the profitability of a company on a per-share basis, making it an important indicator for investors. The calculation of EPS is accomplished by taking the net income of the company and adjusting it for any preferred dividends, which are payments made to preferred shareholders before any income is allocated to common shareholders.

Specifically, the formula used is:

Earnings per Share = (Net Income - Preferred Dividends) / Average Common Shares Outstanding.

This formula reflects the income that is available to common shareholders, which is obtained by subtracting preferred dividends from net income. The result is then divided by the average number of common shares outstanding during the period, providing a per-share profit measurement. This is essential because it allows investors to assess a company's performance relative to the number of shares they own, thereby enabling better investment decisions.

In contrast, the other methods provided do not yield an accurate measure of EPS as understood in financial analysis. For instance, including preferred dividends in the numerator or using total shares outstanding without a proper adjustment for preferred dividends and average calculations would result in misleading figures.