Basic EPS vs Diluted EPS | Top 7 Differences You Must Know

Differences Between Basic EPS and Diluted EPS

Basic EPS and Diluted EPS are profitability metrics of a business.

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 EPS 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.

Let’s get started.

• Basic EPS vs Diluted EPS Infographics
• Basic EPS and Diluted EPS – Key differences
• Basic EPS and Diluted EPS (Comparison Table)
• Conclusion

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Basic EPS vs Diluted EPS Infographics

There are few basic differences between Basic EPS and Diluted EPS. Let’s have a look at them one by one –

Also, have a look at this detailed article on Earnings Per Share.

 

Basic EPS vs Diluted EPS – Key differences

There are few key differences between basic EPS and diluted EPS. Let’s have a look –

• 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 find 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 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 which have simple capital structure. Diluted EPS is used for companies which have complex capital structure.
• Basic EPS is always higher than diluted EPS since in diluted EPS all convertible securities are added to the common shares in the denominator.

Basic EPS and Diluted EPS Comparison Table

Basis for Comparison of Basic and Diluted EPS	Basic EPS	Diluted EPS
1.    Inherent meaning	Helps find out the basic earnings of the company per equity share.	Helps find out the earnings of the company per convertible share.
2.    Purpose	To find out the profitability of a company.	To find out the profitability of a company by including convertible securities.
3.    Significance to investors	Less as it doesn’t include all convertible securities.	More as it includes convertible securities in the calculation.
4.    What are included in calculation?	Common shares.	Common shares, preferred shares, stock options, warrants, debt etc.
5.    Computation	(Net Income – Preferred Dividend) / Outstanding Common Shares.	(Net Income + Convertible Preferred Dividend + Debt Interest) / All convertible securities plus common shares.
6.    Value of measure	More since the denominator is only common shares.	Less since the denominator includes all convertible securities.
7.    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 – basic and diluted EPS.

Ascertaining both will help you find out the basic difference between the basic EPS and diluted EPS. 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, but they can be a good start.

Basic EPS vs Diluted EPS Video

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This has been a guide to differences between Basic EPS and Diluted EPS. You may also look at the following articles to enhance your accounting knowledge.

• Differences Between Options vs Warrant
• Earnings Per Share
• What are Contingent Shares? 
• Leverage Ratios
• Gross Profit Margin