Diluted Earnings Per Share - Diluted EPS

AAA

DEFINITION of '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 EXPLAINS '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.

VIDEO

RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  3. Excluding Items

    The common practice of leaving certain factors out of an overall ...
  4. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
  5. Fully Diluted Shares

    The total number of shares that would be outstanding if all possible ...
  6. Cash Earnings Per Share - Cash ...

    A measure of financial performance that looks at the cash flow ...
Related Articles
  1. The 5 Types Of Earnings Per Share
    Markets

    The 5 Types Of Earnings Per Share

  2. Convertible Bonds: An Introduction
    Bonds & Fixed Income

    Convertible Bonds: An Introduction

  3. Getting The Real Earnings
    Options & Futures

    Getting The Real Earnings

  4. What does the diluted share price reveal ...
    Options & Futures

    What does the diluted share price reveal ...

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center