If you are a new business owner or are thinking of starting your own business, you must first learn the vocabulary of the business world.As your business grows, at some point you may want to consider making your company stocks available to your employees.Or perhaps you want to make your stocks public and allow other people to invest in your company.Regardless what you decide to do with your company, there are certain terms that you must be familiar with before you can make an educated decision.

One extremely important term to any business owner is the phrase “earnings per share.”This article will help you to learn a little bit more about the term “earnings per share”: what they are, what it means, how to calculate them and how this affects your business.

The term “earnings per share” refers to the earnings returned on an investment round, or in other words, the portion of a company’s profit allotted to each outstanding shareof common stock. It is a method of determining the value of a company (along with revenues, income, sales, etc). A company can be analyzed on two levels: the whole company level (including revenues, income, sales) or “per share.” So even if you decide not to allow your company stocks to be made available to the public, you still must be able to calculate your earnings per share.

Earnings per share must be calculated on your income statement for the following items: continuing operations, discontinued operations, extraordinary operations and net income.Earnings per share are calculated by dividing a company’s profit by the “weighted average common shares” or the net income-preferred dividends by “weighted average common shares.”They use weighted shares because it yields a more accurate number.The reason for this is that the number of outstanding shares can change over time.The results are more accurate if the calculation uses the number of shares outstanding at the end of a period or the average number.

Earnings per share are usually considered the most important variable in determining a share’s price.However, there are some people that claim that earnings per share should not be the main source of calculating a stock’s value.Here are a few reasons why measuring earnings per share is not an ideal measure of the value of the company, and therefore its shares:

1. No risk is included in the calculation of earnings per share.A company could be doing well but not taking any risks, and therefore limiting its potential growth.But their earnings per share could be high regardless of that.On the other hand, a company could be taking major risks and growing exponentially.However, their earnings per share may be lower because their growth has not yet shown up in their revenues and stock.
2. No attention is paid to the time value of money.There is no present calculation for this aspect of earnings per share. Including it would improve the accuracy of earnings per share.
3. There is not consideration of dividend policy.For example, a decrease in dividends will still show an increase in earnings, but in reality should not change the value.
4. Investment requirements are not included.For example, changes in the working capital are not considered in the earnings.

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