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How to Calculate EPS Using Preferred Dividends

Original post by Bryan Keythman of Demand Media

The amount of a company’s earnings per share (EPS) is the amount of net income, or profit, it generates per share of common stock in an accounting period. The amount of preferred dividends is the portion of net income a company pays to preferred stockholders, who have a priority over common stockholders for receiving dividends. You must subtract the amount of preferred dividends from net income to determine the portion of net income that is available to common stockholders. A higher EPS creates more value for common stockholders.

Step 1

Find a company’s financial statements in its 10-K annual report. You can get a company’s 10-K annual report from the investor relations section of its website or from the U.S. Securities and Exchange Commission’s online EDGAR database.

Step 2

Find the amount of the company’s net income, listed on its income statement. For example, assume the company earned $5 million in net income.

Step 3

Find the amount of preferred dividends the company paid, listed in the “Cash Flows from Financing Activities Section” of its cash flow statement. In this example, assume the company paid $500,000 in preferred dividends.

Step 4

Find the number of shares of common stock outstanding, listed in the “Stockholders’ Equity” section of the company’s balance sheet. In this example, assume the company has 4.5 million shares outstanding.

Step 5

Subtract preferred dividends from net income to calculate net income available to common stockholders. In this example, subtract $500,000 from $5 million to get $4.5 million in net income available to common stockholders.

Step 6

Divide the amount of net income available to common stockholders by the number of shares outstanding to calculate the company’s EPS. Continuing the example, divide $4.5 million by 4.5 million shares outstanding to get $1 in EPS.

                   

Tips & Warnings

  • Track a company’s EPS over different accounting periods. A rising EPS could lead to a higher stock price as investors may be willing to pay a higher price for more profit.

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About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.

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