You can find out how much each share of a company's common stock contributes toward it's net profit and assess profitability by determining the company's earnings per share.
- Step 1: Subtract the company's dividends on preferred stock from the company's net earnings. Divide the difference by the number of shares outstanding. The quotient is the company's earnings per share, or EPS. Whether you use primary or diluted shares outstanding, either will make a difference in the company's EPS. You can use your knowledge of EPS to decide what stocks best match the growth you're hoping for in your portfolio.
- FACT: The U.S. stock market began on May 17th, 1792, when 24 stock brokers and merchants signed the Buttonwood Agreement on Wall Street in New York City.
- TIP: Primary shares outstanding are shares that are available to be bought and sold. Diluted shares outstanding are the number of shares that would be available if all warrants, options, and bonds were converted at a specific time, typically the end of a quarter.
- Step 2: Find out the shares of outstanding common stock. Shares of outstanding common stock are shares that have been issued and are in the hands of the public. Shares outstanding are classified as "primary" or "fully diluted."
- Step 3: Derive the company's net income from the company's earnings. You can get the company's net income by subtracting all of the company's costs and expenses from the gross income.
- Step 4: Define the earnings for the company. Decide whether you will use reported earnings or "pro forma" earnings, which may exclude certain atypical expenses or revenue.