Diluted Common Share
Diluted common stock refers to the decrease in earnings per share of common stock after the issuance of new shares or convertible securities under specific circumstances. This is because the newly issued shares or convertible securities will increase the company's capital stock, thereby reducing earnings per share. Diluted common stock is a measure used to assess earnings per share.
Definition: Diluted ordinary shares refer to the phenomenon where the earnings per share (EPS) of common stock decrease after a company issues new shares or convertible securities. This occurs because the new shares or convertible securities increase the company's total share capital, thereby diluting the earnings per share. Diluted ordinary shares are an important metric for measuring earnings per share.
Origin: The concept of diluted ordinary shares originated from the preparation and analysis of company financial statements. As companies diversified their financing methods, particularly through the issuance of new shares or convertible securities to raise funds, investors and analysts needed a way to assess the impact of these financing activities on EPS. Thus, the concept of diluted ordinary shares gradually formed and became widely used.
Categories and Characteristics: Diluted ordinary shares are mainly divided into two categories: Basic EPS and Diluted EPS.
- Basic EPS: Calculated by dividing the company's net profit by the total number of issued common shares, without considering potential dilution factors.
- Diluted EPS: Calculated by dividing the company's net profit by the total number of issued common shares, considering all potential dilution factors such as convertible bonds, options, and warrants.
Specific Cases:
- Case 1: A company currently has 1 million common shares and a net profit of 10 million yuan, resulting in a Basic EPS of 10 yuan. If the company issues 200,000 new shares, increasing the total share capital to 1.2 million shares, with net profit unchanged, the Diluted EPS would be 8.33 yuan.
- Case 2: A company has 1 million common shares and a net profit of 10 million yuan, along with 100,000 convertible bonds. If all these bonds are converted into common shares, the total share capital will increase to 1.1 million shares, with net profit unchanged, resulting in a Diluted EPS of 9.09 yuan.
Common Questions:
- Why is diluted ordinary shares important? Diluted ordinary shares can more accurately reflect the company's earning capacity under all potential dilution factors, helping investors make more informed investment decisions.
- How to calculate Diluted EPS? The calculation method for Diluted EPS is to divide the net profit by the total number of issued common shares, considering all potential dilution factors.
