Diluted Earnings per Share

diluted earnings per share

An earnings measure calculated by dividing net income less preferred stock dividends for a period by the average number of shares of common stock that would be outstanding if all convertible securities were converted into shares of common stock. Net income is adjusted for any changes that would occur because of the conversions. Diluted earnings per share is a particularly effective method of presenting earnings-per-share data for companies with complex capital structures. Compare basic earnings per share. See also dual presentation.

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Diluted earnings per share. In addition to reporting earnings per share, corporations must report diluted earnings per share. This accounts for the possiblity that all outstanding warrants and stock options are exercised, and all convertible bonds and preferred shares are exchanged for common stock.

Diluted earnings actually report the smallest potential earnings per common share that a company could have based on its current earnings. In theory, at least, knowing the diluted earnings could influence how much you would be willing to pay for the stock.

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Diluted Earnings per Share (Diluted EPS)

What Does Diluted Earnings per Share (Diluted EPS) Mean?

A performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities refer to all outstanding convertible preferred shares, convertible debentures, stock options (primarily employee-based), and warrants. Unless the company has no additional potential shares outstanding (a relatively rare circumstance), the diluted EPS will always be lower than the simple EPS.

Investopedia explains Diluted Earnings per Share (Diluted EPS) Earnings per share (EPS) is calculated by dividing a company's earnings by the number of shares outstanding. Warrants, stock options, convertible preferred shares, and the like, all serve to increase the number of shares outstanding. For a shareholder, this is a bad thing because the larger the denominator in the equation (shares outstanding) is, the more the EPS will be reduced. This is a conservative metric because it indicates somewhat of a worst-case scenario. People holding options, warrants, convertible preferred shares, and so on, are unlikely to convert their shares all at once. At the same time, if things go well, there is a good chance that many option and convertible shareholders will convert their holdings into common stock. A big difference between a company's EPS and diluted EPS can indicate high potential dilution for the company's shares, an attribute almost unanimously disfavored by analysts and investors alike.

Related Terms:
• Dilution
• Earnings
• Earnings per Share—EPS
• Fully Diluted Shares
• Outstanding Shares