Question

What is the Basic and Diluted earnings per Share?

Answer 1

EPS VS DILUTED EPS

Earning per share(EPS) and diluted EPS are profitability measure used in the fundamental analysis of the companies.EPS takes into account a company's common shares, whereas diluted EPS taken into account all convertible securities,such as convertible bonds or convertible preferred stock,which are changed into equity or common stock.

BASIC EARNING PER SHARE

Basic earnings per share (EPS) tells investors how much of a firm's net income was allotted to each share of common stock. It is reported in a company's income statement and is especially informative for businesses with only common stock in their capital structures.

Understanding Basic Earnings Per Share

One of the first performance measures to check when analyzing a company’s financial health is its ability to turn a profit. Earnings per share (EPS) is the industry standard that investors rely on to see how well a company has done.

Basic earnings per share is a rough measurement of the amount of a company's profit that can be allocated to one share of its common stock. Businesses with simple capital structures, where only common stock has been issued, need only release this ratio to reveal their profitability. Basic earnings per share does not factor in the dilutive effects of convertible securities.

Basic EPS = (Net income - preferred dividends) ÷ weighted average of common shares outstanding during the period.

DILUTE EARNING PER SHARE

Conversely, diluted EPS is a metric used in fundamental analysis to gauge a company's quality of earnings per share assuming all convertible securities have been exercised. Convertible securities include all outstanding convertible preferred shares, convertible debt, equity options (mainly employer-based options), and warrants.

To calculate diluted EPS, take a company's net income and subtract any preferred dividends, then divide the result by the sum of the weighted average number of shares outstanding and dilutive shares (convertible preferred shares, options, warrants, and other dilutive securities).

The Formula for Diluted Earnings per Share:-

Diluted Eps = Net income - preferred dividend\waso+cds

Where eps = earning per share

Waso = weighted average shares outstanding

Cds = conversion of dilute securities.

Diluted EPS considers what would happen if dilutive securities were exercised. Dilutive securities are securities that are not common stock but can be converted to common stock if the holder exercises that option. If converted, dilutive securities effectively increase the weighted number of shares outstanding, which decreases EPS.