Earnings per share (EPS) and diluted EPS are profitability measures used in the fundamental analysis of companies. EPS only takes into account a company's common shares, whereas diluted EPS take into account all convertible securities.
What Is EPS?
EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares
For example, assume company ABCWXYZ had a net income of $50 million over the last fiscal year, but did not pay any dividends, and has common shares outstanding of 15 million.
Company ABCWXYZ's resulting EPS is $3.33 (($50000000 - 0) / 15000000) per share.
How Is Diluted EPS Different Than Basic EPS?
Conversely, diluted EPS is a metric used in fundamental analysis to gauge a company's quality of earnings per share, assuming all convertible securities are exercised. Convertible securities include all outstanding convertible preferred shares, convertible debt, equity options (mainly employee-based options), and warrants.
The formula used to calculate a company's diluted EPS is a company's net income, minus preferred dividends, divided by the weighted average number of shares outstanding, plus the impact of convertible preferred shares and the impact of options, warrants and other dilutive securities.
Diluted EPS = (Net Income - Dividends on Preferred Stock) / (Average Outstanding Shares + Diluted Shares)
For example, assume company ABCWXYZ has employee stock options that could be converted to 1 million common shares and convertible preferred shares that could be converted to 3 million common shares.
The resulting diluted EPS for company ABCWXYZ is $2.63 (($50000000 - 0) / (15000000 + 1000000 + 3000000)) per share.
Generally, if a company has convertible securities, the diluted EPS is less than its basic EPS.