When you’re looking at a company’s profitability, one number that often pops up is Earnings Per Share (EPS). But did you know there’s a more conservative version called Diluted EPS?
Let’s break it down so it’s super easy to understand — no finance degree needed! 😄
Table of Contents
💡 What is Diluted EPS?
Diluted EPS shows how much profit a company earns per share, if all potential shares were converted into actual shares.
These potential shares can come from:
- Stock options
- Convertible bonds
- Convertible preferred shares
- Warrants
Why does this matter? Because if more shares are added, each one gets a smaller slice of the earnings pie. 🍰
📊 Diluted EPS Formula
Here’s the standard formula:
Diluted EPS = (Net Income – Preferred Dividends) ÷ (Weighted Avg Shares + Potential Diluted Shares)✅ Example
Let’s say a company has:
- Net income = $1,000,000
- Preferred dividends = $100,000
- Weighted average shares = 500,000
- Potential shares from stock options = 50,000
Step 1: Subtract preferred dividends from net income
$1,000,000 – $100,000 = $900,000Step 2: Add potential shares to the average shares
500,000 + 50,000 = 550,000Step 3: Divide to get diluted EPS
Diluted EPS = $900,000 ÷ 550,000 = $1.64So, diluted EPS = $1.64 per share.
Compare that to the basic EPS, which would’ve been:
Basic EPS = $900,000 ÷ 500,000 = $1.80See the difference? 📉 The diluted version is lower — and that’s the point!
🧠 Why Use Diluted EPS?
Diluted EPS gives investors a realistic worst-case scenario. If all possible shares were turned into real shares, what would the earnings look like per share?
It’s a conservative and more transparent view of a company’s profitability.
🔍 Basic EPS vs Diluted EPS
| Metric | What It Shows |
|---|---|
| Basic EPS | Profit per actual share |
| Diluted EPS | Profit per share if all convertibles are issued |
Investors often use both when analyzing a company’s performance!
📝 Quick Recap
Diluted EPS = (Net Income – Preferred Dividends) ÷ (Avg Shares + Potential Shares)Use this when you want to understand how additional shares could dilute your slice of earnings pie.