Diluted Earnings Per Share
Diluted Earnings Per Share (Diluted EPS) is the net income per share calculated assuming that all convertible securities (such as convertible bonds, stock options, and warrants) are converted into common stock. Diluted EPS provides a more conservative measure of profitability than basic EPS because it accounts for the potential dilution of shares.
Calculation formula:
Diluted EPS=(Net Income−Preferred Dividends)÷(Weighted Average Shares Outstanding+Shares from Conversion of Dilutive Securities)
Definition:
Diluted Earnings Per Share (Diluted EPS) refers to the net earnings per share after considering all potential dilutive securities, such as convertible bonds, stock options, and warrants, being converted into common stock. Diluted EPS provides a more conservative measure of a company's profitability compared to Basic EPS, as it accounts for the potential expansion of equity that could affect earnings per share.
Origin:
The concept of Diluted EPS originated in the mid-20th century as financial markets evolved and companies began using a variety of financing tools. Investors and analysts needed a more comprehensive metric to assess a company's profitability. The U.S. Securities and Exchange Commission (SEC) mandated the disclosure of Diluted EPS for publicly traded companies in the 1990s.
Categories and Characteristics:
1. Basic EPS: Does not consider potential dilutive securities and is calculated based on the current outstanding common shares.
2. Diluted EPS: Considers all potential dilutive securities, providing a more conservative assessment of profitability.
Case Studies:
Case 1: A company has a net profit of 10 million CNY, preferred dividends of 1 million CNY, 10 million outstanding shares, and 2 million potential shares from dilutive securities.
Calculation: Diluted EPS = (10 million CNY - 1 million CNY) / (10 million shares + 2 million shares) = 0.75 CNY/share.
Case 2: Another company has a net profit of 5 million CNY, preferred dividends of 0.5 million CNY, 5 million outstanding shares, and 1 million potential shares from dilutive securities.
Calculation: Diluted EPS = (5 million CNY - 0.5 million CNY) / (5 million shares + 1 million shares) = 0.75 CNY/share.
Common Questions:
1. Why is Diluted EPS lower than Basic EPS?
Because Diluted EPS accounts for potential equity expansion, increasing the number of shares in the denominator, thus reducing the earnings per share.
2. What securities can cause dilution?
Convertible bonds, stock options, and warrants can all cause dilution.
