What is diluted earnings per share (diluted EPS)
Diluted EPS is a calculation used to assess the quality of a company’s earnings per share (EPS) if all the convertible securities have been exercised. Convertible securities are all convertible preferred shares, convertible debentures, stock options and warrants outstanding. Unless a company has no additional potential shares outstanding (rare), the diluted EPS will always be lower than the simple or basic EPS.
The diluted earnings per share formula
TheDiluted EPS=WASO+CDSNet revenue–Preferred dividendsTheor:WASO=Weighted average shares outstandingCDS=Conversion of dilutive securitiesDilutive securities=Course options, warrantsand other titlesTheThe
Explanation of earnings per share
What does diluted earnings per share (diluted EPS) tell you?
Diluted EPS considers what would happen if dilutive securities were exercised. The dilutive securities are securities which are not ordinary shares but which can be converted into ordinary shares if the holder exercises this option. If they are converted, dilutive securities effectively increase the weighted number of shares in circulation, which decreases EPS.
The importance of PSE
Earnings per share, the value of earnings per share of common shares outstanding, is a very important measure for assessing the financial health of a business. When reporting financial results, income and EPS are the two most frequently evaluated parameters.
EPS is declared in the income statement of a company and only public companies are required to report it. In reporting results, companies report both primary and diluted EPS, but the focus is generally on the more conservative measure of diluted EPS. Dilutive PSE is considered a conservative measure because it indicates the worst-case scenario in terms of PSE.
It is unlikely that anyone with options, warrants, convertible preferred shares, etc. convert their shares simultaneously. However, if all goes well, there is a good chance that all options and convertibles will be converted into common shares.
A large difference between a company’s basic EPS and diluted EPS may indicate a high potential dilution for the company’s shares, an attribute that most analysts and investors find unattractive. For example, Company A has $ 9 billion worth of shares outstanding. There is a difference of $ 0.10 between its basic EPS and its diluted EPS. Although $ 0.10 seems insignificant, it is equivalent to $ 900 million in value not available to investors.
Common dilutive securities
Convertible preferred shares, stock options and convertible bonds are common types of dilutive securities. The convertible preferred share is a preferred share that can be converted into common share at any time. Stock options, a common benefit for employees, give the buyer the right to buy common shares at a fixed price at a set time.
Convertible bonds are similar to convertible preferred shares in that they are converted into common shares at the prices and at the times specified in their contracts. All of these securities, if exercised, would increase the number of shares outstanding and decrease EPS.