What’s the Difference Between Basic and Diluted Earnings Per Share? Basic Earnings Per Share vs. Diluted earnings per stock options dilution calculation, or diluted EPS as it is often called, is a more accurate version of how much profit is left for you, the owner, for every share of stock you have in a company.
Difference Between Basic and Diluted Earnings Per Share? Next up in our lesson on analyzing the income statement is a discussion on the difference between basic earnings per share, or Basic EPS, and diluted earnings per share, or Diluted EPS. When you dive into the profit and loss statement of a company, you have to do it on two levels. The first is looking at the entire business. Namely, how profitable is the company as a whole? The second is examining the profits per share. Remember that publicly traded companies are cut up into individual pieces with each of those pieces representing part of the overall ownership pie.
How much of the after-tax income is each individual piece of the company entitled to receive? For the individual investor, the latter figure is what really counts. This is a fairly common problem and one you’ll likely discover more often than not. They understand that each time a new share is issued, the existing owners are, in effect, selling some of their current business assets and giving it up to whoever is receiving that share. It’s not perfect, and it won’t catch everything, but it’s a great place to start.
They decided to require two different earnings per share figures to be displayed by companies in their disclosures. Diluted earnings per share adjusts the Basic earnings per share figure by including all potential dilution that, if triggered at present prices and conditions, would result in the reported earnings per share being lower than they otherwise would have been. For example, using our earlier illustration, if there were 5,000,000 shares of stock that could be issued at any time due to a convertible security held by an early investor being eligible for conversion at a price lower than the current market price, the formula would need to account for that. One thing to keep in mind about Diluted EPS, which we will discuss later in this lesson, is the fact that anti-dilutive conversions aren’t included in the calculation.