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Investors can make money by purchasing stock in companies that pay dividends on a per share basis. Companies that pay dividends regularly, such as every quarter, decide how much money they want to distribute to shareholders and make that payment after the quarter ends. To calculate Earnings per Share, you divide the income to be paid to shareholders of common stock by the number of outstanding shares. As you can see here in our worksheet, we have 45 million shares. This is 45,000, but because all values are in thousands, we have 45000x1000, which is 45 million outstanding shares.
We also have the net income available for shares of common stock, which is 18000x1000 or 18 million. So then to find the Earnings per Share, you create a formula that divides the Income Available for Common Shares, which is in B6, by the number of Outstanding Shares, which is in B5, press Enter and you have an earning of 40 cents per share. There are some factors you should take into account when you're evaluating a company based on their Earnings per Share. First off is that companies can decide against paying dividends to shareholders and instead retain the earnings to spend on items such as research and development, new office buildings or equipment upgrades.
Earnings per Share can also be skewed positive by generating unusually high income such as selling a product line to another company or negatively by one time charges such as writing off substantial debt. Companies can also buy back stock to reduce the number of outstanding shares, making the per share price look better. Be sure to check a company's public filings to see if they've bought back any shares recently. You should also be sure to determine whether a company has issued any preferred stock, which has paid its dividend before consideration, if any, is given to the holders of common stock.
Companies often give guidance regarding how much of a dividend they expect to pay in future quarters. Comparing the company's Earnings per Share with the amount of money they retain for capital improvement and business development, provides a solid basis for evaluating the attractiveness of a company stock.
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