Basic EPS vs Diluted EPS

Article bySayantan Mukhopadhyay

Reviewed byDheeraj Vaidya, CFA, FRM

Differences Between Basic EPS and Diluted EPS

Both basic and diluted EPS are used to determine a company’s profitability. The basic EPS is calculated by taking into account the outstanding common shares. However, diluted earnings per share include not just common shares but also convertible securities such as options, warrants, and convertible debt.

Basic EPS measures how much a business earns per share without going much into any other detail. Simply by dividing the (net income – preferred dividend) with the number of outstanding equity shares, we would be able to calculate basic EPS.

Diluted EPS, on the other hand, takes convertible securities into account to calculate earnings per share. Convertible securities include convertible preferred shares, employee stock options, debt, equity, etc.

In layman’s terms, the basic difference between basic EPSBasic EPS Basic EPS represents the income of the company for each common stock. In other words, it is the value appreciation of the common shares resulting from equal distribution of the company's profit as dividends among the common stockholders.read more and diluted EPS is that in diluted EPS, it is assumed that all the convertible securities will be exercised.

Basic-EPS-vs-Diluted-EPS

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In this article, we will go through each metric and try to make a comparative analysis between them.

Basic EPS vs. Diluted EPS Infographics

Basic EPS vs. Diluted EPS Infographics

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Key differences

Basic EPS is a simple measure of profitability. Diluted EPS, on the other hand, is a complex measure.
Basic EPS is the most suitable, but not very sound approach to finding out how a company is doing financially. Diluted EPS is a much better and strictest approach to find out how a company is doing financially.
Basic EPS can be calculated just by deducting the preferred dividend from the net income and then by dividing it with the outstanding equity shares. 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.
Basic EPS is used for companies that have a simple capital structure. Diluted EPSDiluted EPS Diluted EPS is a financial ratio to check the quality of the Earnings per Share after taking into account the exercise of Convertible Securities like Preference Shares, Stock Option, Warrants, Convertible Debentures etc.read more is used for companies that have complex capital structures.
Basic EPS is always higher than diluted EPS since, in diluted EPS, all convertible securities are added to the common shares in the denominator.

Comparative Table

Basis for Comparison		Basic EPS		Diluted EPS
Inherent meaning		Help find out the basic earnings of the company per equity share.		Help find out the earnings of the company per convertible share.
Purpose		To find out the profitability of a company.		To find out the profitability of a company by including convertible securities.
Significance to investors		Less as it doesn’t include all convertible securities;		More as it includes convertible securities in the calculation.
What is included in the calculation?		Common shares.		Common shares, preferred shares, stock options, warrants, debt, etc.;
Calculation		(Net Income – Preferred Dividend) / Outstanding Common Shares.		(Net Income + Convertible Preferred Dividend + Debt Interest) / All convertible securities plus common shares.
Value of measure		More since the denominator is only common shares.		Less since the denominator includes all convertible securitiesConvertible Securities Convertible securities are securities or investments (preferred stocks or convertible bonds) that can be easily converted into a different form, such as shares of an entity's common stock, and are typically issued by entities to raise money. In most cases, the entity has complete control over when the conversion occurs.read more.
Ease of use		Easy.		Comparatively complex.

Conclusion

Basic EPS and diluted EPS go hand in hand. If the company’s capital structure is quite complex, it’s always better to go for both.

Ascertaining both will help you find out the basic difference between them. And you would be able to see the earnings per share of a company under a very conservative measure. Though only calculating basic EPS and diluted EPS will not provide you every minor detail of the company’s financial health, they can be a good start.

Basic EPS vs. Diluted EPS Video

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