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What does the earnings per common share ratio measure?

Side by side with dividend per share, the earnings per common share ratio is one of the most widely used and understood of all ratios. It’s easy to calculate and is reported commonly in the financial press.

Net earnings (before extraordinary items) – preferred dividends/Number of common shares outstanding Fully diluted earnings per share is a figure that is calculated on common stock outstanding, plus common stock equivalents such as convertible preferred stock, convertible debentures, stock options (under employee stock-option plans) and warrants, which enable the holder to become a common shareholder by converting or exchanging his or her securities. It shows the dilution in earnings per share that would occur if all equivalent securities were converted into common. Because earnings from operations after all prior claims have been met belong to the common shareholders, they have a vital interest in knowing how much has been earned on their shares. If net earnings are high, directors may declare and pay out a good portion as dividends. Even in the case of growth companies, at least a token payment is often made because management realizes that most shareholders like to feel some profits are flowing into their pockets through dividend income. On the other hand, if net earnings are low or a loss has been suffered, no dividends may be forthcoming on the common shares. Reducing net earnings to a per-common-share basis lets the shareholder see clearly how profitable his or her ownership interest in the company is, and whether dividends are likely to be paid. If net earnings are equal to $3 for each common share and regular dividends of $1 per share per year are being paid on common shares, this indicates that the dividend is well protected by earnings. In other words, earnings per common share are $2 more than regular dividend payments. Since common share dividends are declared and paid at the company board of directors’ discretion, no rules can be laid down to judge the amount likely to be paid out at a given level of earnings. Dividend policy varies from industry to industry and from company