Earnings per shareEarnings per share (EPS) is the monetary value of earnings per each outstanding share of a companys common stock.In the United States, the Financial Accounting Standards Board (FASB) requires companies income statements to report EPS for each major category of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.Calculating EPSPreferred stock rights have precedence over common stock. Therefore, dividends declared on preferred shares are subtracted before calculating the EPS. When preferred shares are cumulative, the annual dividends are deducted whether they have been declared or not. Dividends in arrears are not relevant when calculating EPS.Earnings per share (basic formula)Earnings per share (net income formula)Earnings per share (continuing operations formula)References WikipediaEarning per share, also called net income per share, is amarket prospect ratiothat measures the amount of net income earned per share of stock outstanding. In other words, this is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year.Earnings per share is also a calculation that shows how profitable a company is on a shareholder basis. So a larger companys profits per share can be compared to smaller companys profits per share. Obviously, this calculation is heavily influenced on how many shares are outstanding. Thus, a larger company will have to split its earning amongst many more shares of stock compared to a smaller company.FormulaEarnings per share or basic earnings per share is calculated by subtracting preferred dividends from net income and dividing by the weighted average common shares outstanding. The earnings per share formula looks like this.Youll notice that the preferred dividends are removed from net income in the earnings per share calculation. This is because EPS only measures the income available to commonstockholders. Preferred dividends are set-aside for the preferred shareholders and cant belong to the common shareholders.Most of the time earning per share is calculated for year-end financial statements. Since companies often issue new stock and buy back treasury stock throughout the year, the weighted average common shares are used in the calculation. The weighted average common shares outstanding is can be simplified by adding the beginning and ending outstanding shares and dividing by two.AnalysisEarning per share is the same as any profitability or market prospect ratio. Higher earnings per share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders.Although many investors dont pay much attention to the EPS, a higher earnings per share ratio often makes the stock price of a company rise. Since so many things can manipulate this ratio, investors tend to look at it but dont let it influence their decisions drastically.ExampleQuality Co. has net income during the year of $50,000. Since it is a small company, there are no preferred shares outstanding. Quality Co. had 5,000 weighted average shares outstanding during the year. Qualitys EPS is calculated like this.As you can see, Qualitys EPS for the year is $10. This means that if Quality distributed every dollar of income to its shareholders, each share would receive 10 dollars.Understanding Earnings Per ShareOne of the challenges of evaluating stocks is establishing an apples to apples comparison. What I mean by this is setting up a comparison that is meaningful so that the results help you make an investment decision.Comparing the price of two stocks is meaningless as I point out in my articleWhy Per-Share Price is Not Important.Similarly, comparing the earnings of one company to another really doesnt make any sense, if you think about it. Using the raw numbers ignores the fact that the two companies undoubtedly have a different number of outstanding shares.For example, companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which companys stock do you want to own?It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.EPS = Net Earnings / Outstanding SharesUsing our example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the sa