Diluted Earnings per Share (EPS) is a financial metric that provides a more comprehensive view of a company's potential per-share profitability by accounting for the dilutive effects of convertible securities, employee stock options, and secondary offerings12. Here's a detailed explanation:
- Basic EPS vs. Diluted EPS: Basic EPS measures a company's earnings per share based on the weighted average number of common shares outstanding. Diluted EPS takes into account the potential dilution that could occur if all convertible securities and employee stock options were exercised, by adding the number of additional common shares that would be outstanding under those conditions1.
- Calculation Method: To calculate diluted EPS, you start with the company's net income (excluding preferred dividends) and divide it by the sum of the weighted average number of shares outstanding and the number of dilutive shares (convertible preferred shares, options, warrants, and other dilutive securities)2.
- Importance: Diluted EPS is important because it provides a more realistic view of a company's earnings potential, especially for investors who may need to factor in the potential dilution from employee stock options or convertible securities1. It is often used in fundamental analysis to gauge a company's quality of EPS1.
- Example: For example, if a company has 10 million common shares outstanding and grants employee stock options that could be converted to 1 million additional common shares, the diluted EPS would reflect the potential dilution, making it less than the basic EPS1.
In conclusion, diluted EPS is a more conservative measure of a company's earnings power compared to basic EPS, as it accounts for potential dilution that could occur in the future due to the exercise of dilutive securities.
8/15/2024 01:10pm
