Diluted EPS
IntermediateDiluted EPS is earnings per share calculated as if all securities that could become ordinary shares, such as stock options, warrants and convertible bonds, had been converted, giving a more cautious measure of profit per share.
Many companies have instruments that could create new shares in the future. If those shares were issued, each existing share would represent a smaller slice of profit. Diluted EPS shows what earnings per share would look like in that case.
For example, a company has net income of 10 million and a weighted average of 5 million shares, so its basic EPS is 2.00. It also has employee stock options that would create a net 250,000 additional shares if exercised. Including them gives 5.25 million shares and diluted EPS of about 1.90.
Accounting rules specify how to calculate diluted EPS. For options, they typically assume the cash received from exercise is used to buy back shares at the market price, so only the net new shares are counted. Securities are included only if they would reduce EPS; those that would increase it are left out.
Diluted EPS is generally the figure analysts use for valuation measures such as the price-to-earnings ratio, because it reflects the full potential share count. A large gap between basic and diluted EPS indicates that existing shareholders face significant potential dilution.
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