Corporate Finance For Dummies
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In the earnings per share (EPS) portion of the income statement, which immediately follows net income, corporations have to include the amount of earnings each individual share of stock they have outstanding has generated. Here are the two main components of this portion:

  • Basic earnings per share: Companies calculate the basic earnings per share by dividing net earnings by the total number of common shares outstanding. This calculation tells investors how much money each share of stock they own earned during the period.

    For example, if a company made $1,000 during a year and has a total of 1,000 shares of stock, then everyone who owns that company’s stock made $1 per share of stock.

  • Diluted earnings per share: A company can issue a number of options that can eventually turn into common stock. For example, company employees may be given stock options, or preferred shares and convertible bonds may be converted into common stock.

    The diluted earnings per share does the same thing as basic earnings per share except that it assumes all these different holding options have been turned into common shares. So a company that made $1,000 and has 1,000 shares of stock has an earnings per share of $1. But if that company also has 1,000 shares of convertible preferred stock, its diluted earnings per share is $0.50.

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Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.

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