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.

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