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Basic earnings per share (EPS) and diluted EPS are used to measure the profitability of a company. Basic EPS is calculated, taking into account the outstanding equity shares of the company. Diluted EPS includes convertible shares such as employee stock options, warrants, debt in its calculation.

## What’s the difference between basic and diluted EPS?

Basic EPS is a simple measure of profitability. Diluted EPS, on the other hand, is a complex measure. … Diluted EPS, on the other hand, can be calculated by adding net income, convertible preferred dividend, and debt interest and then dividing the sum by outstanding shares plus all convertible securities of the company.

## What does it mean to dilute earnings?

Diluted earnings per share (diluted EPS) calculates a company’s earnings per share if all convertible securities were converted. Dilutive securities aren’t common stock, but instead securities that can be converted to common stock.

To calculate diluted EPS, take a company’s net income and subtract any preferred dividends, then divide the result by the sum of the weighted average number of shares outstanding and dilutive shares (convertible preferred shares, options, warrants, and other dilutive securities).

Share dilution is when a company issues additional stock, reducing the ownership proportion of a current shareholder. Shares can be diluted through a conversion by holders of optionable securities, secondary offerings to raise additional capital, or offering new shares in exchange for acquisitions or services.

Diluted shares must always be used when calculating a company’s MVE, or market value of equity, as the market values company shares using diluted stocks. The number of diluted shares can cause discrepancies in important figures, such as a company’s EPS, or earnings per share; the diluted EPS can affect the basic EPS.

Stocks with an 80 or higher rating have the best chance of success. However, companies can boost their EPS figures through stock buybacks that reduce the number of outstanding shares.

## How is diluted EPS example calculated?

Diluted EPS Formula = Net Income(Before Preferred Dividends)+After Tax Cost of Interest / (Common Shares Outstanding +Additional Shares Against Exercise of Convertible Securities)

- Diluted EPS = (20,00,000 + 0) / (8,00,000 + 50,000)
- Diluted EPS = 20,00,000 / 8,50,000.
- Diluted EPS = 2.35.

## What is diluted EPS formula?

Diluted EPS Formula: Diluted EPS = (net income – preferred dividends) / (weighted average number of shares outstanding + the conversion of any in-the-money options, warrants, and other dilutive securities)

Basic EPS = (Net income – preferred dividends) ÷ weighted average of common shares outstanding during the period.

Average Basic Shares Outstanding are the average number of current shares in company’s stock outstanding over the reporting period, before accounting for the effects of dilution from events like exercises of employee options, convertible bonds, and so forth.

Dilution is the reduction in shareholders’ equity positions due to the issuance or creation of new shares. Dilution also reduces a company’s earnings per share (EPS), which can have a negative impact on share prices.