WSJ: Earnings Per Share, Explained


It should be clear that when you invest in a company, you need to know how much money it makes.

But here's the rub: There are several "earnings" figures that a public company reports to its investors. So which one should you look at?

When you look at a company's earnings reports (also known as 10Q and 10K Securities and Exchange Commission filings), they can be a tad confusing. You'll see net income, basic earnings per share and diluted earnings per share—three different measures of profit.

Net income is the total profit after taxes that the company made in either the quarter or the year. But for a stock investor, that isn't the most important number. As a shareholder, you own only part of the company, so it's best to look at earnings per share, or EPS.

The basic per-share figure essentially is the net income divided by the number of common shares outstanding. It tells you the total earnings attributable to each common share that you own. It's calculated for you on the SEC forms.

But that figure still doesn't tell you the whole story. That's because the number of shares outstanding could change significantly if any of the investors or employees of the company who have rights to shares that don't currently exist exercise those rights.

For instance, top executives routinely are paid in part with stock options. And many companies issue debt or preferred shares that can be converted into common stock under certain conditions.

The measure called fully diluted earnings per share takes all that into account. It tells you the total earnings attributable to each common share if all the existing rights to common shares were exercised.

Dow Jones publications, such as The Wall Street Journal, Dow Jones Newswires and, use fully diluted earnings per share in stories. We do this because it's considered a more conservative measure of a company's profit than basic EPS.

See original story here.
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