What is the equation for calculating Earnings Per Share (EPS)?

The equation for calculating Earnings Per Share (EPS) is defined as (Net income - preferred dividends) divided by the average number of common shares outstanding during the period. This calculation provides an indication of a company's profitability allocated to each outstanding share of common stock.

When determining EPS, it is essential to account for preferred dividends, as these are obligations that must be paid before profits can be distributed to common shareholders. Therefore, subtracting preferred dividends from net income allows for a more accurate reflection of the earnings available to common stockholders.

Using average common shares also ensures that any fluctuations in the number of shares outstanding during the reporting period are taken into account, thereby providing a more accurate EPS figure than if the total number of shares were used instead. This helps in comparing performance over time or against other companies, as it presents a normalized figure of earnings allocated to common shares.

In contrast, other calculations do not accurately represent the earnings attributable solely to common shareholders or do not use the average number of shares, leading to potential distortions in assessing company performance.