Difference between EPS vs Diluted EPS
The following article provides an outline for EPS vs diluted EPS. Earnings per share or EPS and diluted EPS are companies’ most commonly used measures of profitability. EPS is calculated based on the outstanding number of equity shares of the company. In contrast, diluted EPS is calculated by considering the number of convertible shares, such as employee stock options, debt, warrants, etc. In short, it can be said that basic EPS is a straightforward measure as compared to diluted EPS. Nevertheless, the calculation of EPS and diluted EPS and the difference between them is an essential metric for an investor as both are equally critical for the fundamental analysis of a company.
What is Earnings Per Share or EPS?
EPS helps measure the amount of profit a company generates on a per-share basis. Unlike diluted EPS, this simple EPS doesn’t consider the dilutive effects of the convertible securities, employee stock options, debt, warrants, etc., in its calculation.
The dilutive effects of the convertible securities occur when the number of outstanding shares increases through the issuance of new shares due to the conversion of other securities into equity. In short, when a company issues more shares, it increases the number of shares outstanding, and eventually, it adversely impacts the company’s EPS. It can also decrease the company’s share price in the short term.
To calculate the EPS of a company, any preferred dividend during the year is deducted from the company’s net income, and the result is divided by the weighted average number of outstanding shares. The weighted average number of shares refers to the measurement of the year-end number of outstanding shares that investors use to monitor the cost basis of the shares accumulated during a year.
Mathematically, the formula for the calculation of EPS can be represented as,
EPS = (Net income – Preferred dividend) / Weighted average no. of outstanding shares
What is Diluted EPS?
On the other hand, diluted EPS is a financial metric employed by investors in the fundamental analysis of a company to gauge its quality of EPS taking cognizance of all convertible securities that may be exercised in the future. Convertible securities refer to all convertible debt, preferred shares, equity options, warrants, etc.
To calculate diluted EPS, it is critical to identify the dilutive effects of all the convertible securities that can result in a more significant number of outstanding shares in the future. Similar to basic EPS, diluted EPS is calculated by deducting any preferred dividend from the company’s net income and then dividing the result by the aggregate number of outstanding common shares and convertible securities (such as convertible shares, warrants, options, etc.).
Mathematically, the formula for the calculation of diluted EPS can be represented as,
Diluted EPS = (Net income – Preferred dividend) / (Weighted average no. of outstanding shares + the conversion of any preferred share, warrants, options, and other dilutive securities)
Head-to-Head Comparison Between EPS vs diluted EPS
Below are the top 5 differences between EPS vs diluted EPS
EPS vs Diluted EPS – Key Differences
The following are some of the key differences between basic EPS vs diluted EPS:
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- Although basic EPS is very simple and easy to use, it is not considered a good metric to gauge a company’s financial health. On the other hand, diluted EPS is a relatively stricter approach to assessing a company’s financial performance.
- The metric of basic EPS is primarily helpful in gauging the financial health of companies with a simple capital structure. On the other hand, diluted EPS gives a better idea of the financial standing of companies with more complex capital structures as it considers the dilutive effects of convertible securities. Most large companies tend to have potential diluters, so diluted EPS is more meaningful in their cases.
- Diluted EPS is invariably lesser than basic EPS because all the convertible securities are summed with the outstanding number of shares and form the denominator in the calculation for diluted EPS.
- Basic EPS fails to consider the adverse impact of equity dilution on per share basis profitability, while diluted EPS captures that appropriately.
Comparison table between EPS vs Diluted EPS
Let’s discuss the top comparison between EPS vs diluted EPS
| Basis For Comparison | EPS | Diluted EPS |
| Meaning | It is a tool that helps measure a company’s profit per share basis. | It is a metric that helps measure the company’s EPS quality while accounting for equity dilution. |
| Calculation | It is derived by dividing the net profit after the preferred dividend payment by the weighted average number of common shares outstanding. | It is derived by dividing the net earnings after the preferred dividend payment by the weighted average number of common shares outstanding and dilutive convertible shares. |
| Significance | It is less significant for investors as it doesn’t include the impact of convertible shares. | It is more beneficial for investors as it incorporates the future impact of dilutive convertible shares, such as warrants, options, etc. |
| Ease of use | It is relatively easier to compute and explain. | It is comparatively more complicated as it involves complexities of conversion and its potential effect on EPS. |
| Value | Its value is relatively higher than that of diluted EPS because of the lower value of the denominator. | Its value is invariably lower than that of basic EPS because of the higher value of the denominator. |
Conclusion
The financial metrics of basic and diluted EPS are helpful for investors as it helps in assessing a company’s worth, performance, and profitability. Investors are interested in identifying the difference between these two numbers. In case of a considerable variation, they tend to avoid such stocks as these remain vulnerable to significant share price devaluation due to equity dilution.
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