Message Font: Serif | Sans-Serif
No. of Recommendations: 0
Diluted Earnings Per Share - Diluted EPS

A performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities refers 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 Says... Remember that earnings per share is calculated by dividing the company's profit by the number of shares outstanding. Warrants, stock options, convertible preferred shares, etc. all serve to increasing the number of shares outstanding. As a shareholder, this is a bad thing. If the denominator in the equation (shares outstanding) is larger, the earnings per share is reduced (the same profit figure is used in the numerator).

This is a conservative metric because it indicates somewhat of a worst-case scenario. On one hand, everyone holding options, warrants, convertible preferred shares, etc. is unlikely convert their shares all at once. At the same time, if things go well, there is a good chance that all options and convertibles will be converted into common stock. A big difference in a company's EPS and diluted EPS can indicate high potential dilution for the company's shares, an attribute almost unanimously ostracized by analysts and investors alike.

I googled the term "diluted earnings per share" and found this definition. I was going to just explain it myself but then figured that by using the link you would then have access to more information if you want to browse through it.

My definition would be that diluted earnings per share is net income divided by the number of shares outstanding plus any additional shares that could be converted from outstanding stock options and convertible securities. Usually a company will report "basic" earnings per share which is net income divided by the average number of shares outstanding during the period. Then they might also report "fully diluted" earnings per share which would add in any additional shares that could be created from stock options being exercised or convertible shares and/or bonds being converted into more shares of common stock.

Hope this helps,

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.