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Earnings Per Share

The net profit of a firm, divided by the number of outstanding shares of common stock. Earnings Per Share is a calculation that attempts to convey how much of a company’s quarterly and annual returns an investor has earned per share of common stock that they own. To calculate Earnings Per Share, simply take the earnings (or loss) for a given period and divide it by the number of outstanding shares. If the number of investors has changed during the year, this amount will have to be calculated as a weighted average of the outstanding shares for the purpose of determining Earnings Per Share. Although this calculation can be very helpful to provide insight to investors, it does not fully capture the profitability of the company due to the potential issuance of shares in the future. For example, many existing executives receive stock options that can be converted into new shares of the company. Bond (and other debt holders) will sometimes receive warrants that they can then convert the current shares into new shares. A variation of the Earnings Per Share calculation known as the diluted earnings per share, will assume that all of these potential shares are issued at face value which will appear to be a reduction in the Earnings Per Share that is to be received by each unit holder.

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