Diluted Earnings Per Share - Diluted EPS


DEFINITION of 'Diluted Earnings Per Share - Diluted EPS'

Diluted Earnings Per Share (or Diluted EPS) is 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.


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BREAKING DOWN 'Diluted Earnings Per Share - Diluted EPS'

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 to 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.

  1. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  2. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  3. Excluding Items

    The common practice of leaving certain factors out of an overall ...
  4. Cash Earnings Per Share - Cash ...

    A measure of financial performance that looks at the cash flow ...
  5. Warrant

    A derivative security that gives the holder the right to purchase ...
  6. Anti-Dilution Provision

    A provision in an option or a convertible security. It protects ...
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