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 EPSBasic 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. and diluted EPS is that in diluted EPS, it is assumed that all the convertible securities will be exercised.
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 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 EPSDiluted 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. 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.
|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 securities.|
|Ease of use||Easy.||Comparatively complex.|
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
This article has been a guide to Basic EPS vs. Diluted EPS. Here we discuss the top differences between Basic EPS and Diluted EPS along with infographics and a comparative table. You may also look at the following articles to enhance your accounting knowledge.