Diluted Earnings Per Share - Diluted EPS

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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.

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  1. Why is a company's diluted EPS always lower than its simple EPS?

    A company's diluted earnings per share is lower than its basic earnings per share because diluted earnings per share takes ... Read Full Answer >>
  2. What is the difference between earnings per share (EPS) and diluted EPS?

    Earnings per share (EPS) and diluted EPS are profitability measures used in fundamental analysis of companies. EPS only takes ... Read Full Answer >>
  3. What does it signify about a company if there is a large difference between its EPS ...

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  4. How do you calculate diluted EPS using Excel?

    Diluted earnings per share (EPS) is the EPS calculated using all convertible securities. Diluted EPS takes basic EPS and ... Read Full Answer >>
  5. What does the diluted share price reveal about a company's financial strength?

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