DEFINITION of 'Diluted Normalized Earnings Per Share'

Diluted Normalized Earnings Per Share (EPS) is calculated by dividing a company's profit less its one-time earnings, by both outstanding common stock and its potential shares outstanding if all convertible securities or contingent securities were to be exercised. Diluted normalized EPS differs from regular earnings per share (EPS) in that it takes into account options. This increases dilution, by dividing normalized profit by a larger number shares.

BREAKING DOWN 'Diluted Normalized Earnings Per Share'

Diluted normalized EPS differs from regular earnings per share (EPS) in that it takes into account convertible securities and preferred stock as well as stock options and warrants. Normalized earnings are earnings that have been adjusted to exclude the effects of seasonality, irregular items such as non-recurring expenses, or one-time gains, for instance from the sale of a division, from earnings. Calculating diluted EPS figures based on normalized earnings, excluding one-time events, gives a truer picture of underlying profitability.

Why Is It Important to Look At Fully Diluted EPS?

Including all of a company’s potentially outstanding shares increases earnings dilution to shareholders by spreading a company’s profit over a larger number of shares. As a result, while a company’s diluted normalized EPS might occasionally be similar to its basic EPS, for instance, in cases where the company is large and established, it will almost always be lower. That makes calculating a company’s diluted EPS a more conservative yardstick for analysis, valuation and investment comparisons than just looking at its headline EPS.

Big gaps between the two EPS figures signal a greater risk of potential earnings dilution from a large increase in the number of shares on the market, with fewer earnings to go around. Investors focus on diluted EPS because the number gives a clearer picture of a company's income. The more closely a company's diluted normalized EPS tracks its fully diluted EPS figure, the more stable its ongoing operations are. The greater the difference, the greater the risk of share dilution and unsustainable ongoing operations.

Comparing the two numbers can alert analysts and investors to potential developments likely to result in lower than expected shareholder earnings and dividend payouts. Looking at diluted normalized EPS can also help pinpoint a company with a large number of convertible securities and large stock option issuance. Along with other measures of profitability, analysts and investors typically track a company’s diluted EPS over time, comparing it against its industry peers’ for valuation purposes.

RELATED TERMS
  1. Diluted Earnings Per Share - Diluted ...

    Diluted Earnings Per Share (or Diluted EPS) is a performance ...
  2. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
  3. Dilutive Acquisition

    A dilutive acquisition is a takeover transaction that decreases ...
  4. Fully Diluted Shares

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

    Earnings per share (EPS) is the portion of a company's profit ...
  6. Add-On

    Add-ons describe a situation where a company issues additional ...
Related Articles
  1. Investing

    Investment Valuation Ratios

    Learn about per share data, price/book value ratio, price/cash flow ratio, price/earnings ratio, price/sales ratio, dividend yield and the enterprise multiple.
  2. Investing

    How to pick winning penny stocks

    When choosing penny stocks, wise investors note several key factors that affect the way these stocks trade – and the inherent risks that can follow.
  3. Investing

    Adjusting Price Charts To Secondary Offerings

    Secondary offerings may require rapid readjustment of trading strategies.
  4. Insights

    United Announces Q4 and 2016 Earnings (UAL)

    United released its Q4 and 2016 earnings. The results caused United’s share price to fall slightly after hours.
  5. Investing

    At Least One Retailer Had a Big Win in Q4

    At a time when large numbers of mall-based retailers are struggling, shutting stores to save money, or even going out of business, Children's Place (NASDAQ: PLCE) had a very successful quarter ...
  6. Investing

    A Breakdown Of Stock Buybacks

    Find out what these company programs achieve and what it means for stockholders.
  7. Investing

    Panera Bread Boosts Delivery, Digital Sales in Q4

    Panera Bread (NASDAQ: PNRA) posted strong fourth-quarter results in a year when it took major steps to move become a more digitally driven restaurant company. During Q4, comparable sales at ...
  8. Investing

    JNJ's Valuation? Questionable, Despite Solid Earnings

    While Johnson & Johnson disclosed solid results in Q1, they hardly justify the stock's sky-high P/E ratio.
  9. Investing

    Everything Investors Need To Know About Earnings

    We go over the concepts behind the excitement over the most important figure in the stock market.
RELATED FAQS
  1. Earnings Per Share (EPS) Versus Diluted EPS

    Is EPS worth more than Diluted EPS? Learn about EPS vs diluted EPS, how they are calculated, and the difference between the ... Read Answer >>
  2. What are the differences between dilutive securities and antidilutive securities?

    Learn how investors and accountants apply the terms "dilutive" and "antidilutive" to securities or the exercise of security ... Read Answer >>
  3. The share price and company's secondary offering

    When a company increases the number of shares issued through a secondary offering, it generally has a negative effect on ... Read Answer >>
  4. What is the difference between an accretive and a dilutive merger?

    Learn how to distinguish between a merger and acquisition (M&A) deal that is accretive and one that is dilutive, and why ... Read Answer >>
  5. What is the difference between an accretive transaction and a dilutive transaction?

    Read about the differences between an accretive and dilutive financial transaction, particularly as it pertains to a mergers ... Read Answer >>
  6. Does a stock dividend dilute the price per share as would a forward stock split?

    Determine if paying a dividend to shareholders dilutes the price per share. Find out how a stock split increases shares outstanding ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center