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Diluted EPS is net income per share, assuming all potentially convertible securities (options, warrants, etc.) become actual shares. It shows a more conservative view of earnings per share.
How it relates
Net IncomeNet income is the final profit after subtracting all expenses, interest and taxes. It is the bottom line of the income statement and represents the earnings available to shareholders.÷Diluted Shares OutstandingDiluted shares outstanding includes all potential shares that could be created from options or convertible securities. It represents the maximum possible share count.=EPS (Diluted)
Where it fits
Net IncomeNet income is the final profit after subtracting all expenses, interest and taxes. It is the bottom line of the income statement and represents the earnings available to shareholders.→EPS (Diluted)
Diluted EPS is net income per share, assuming all potentially convertible securities (options, warrants, etc.) become actual shares. It shows a more conservative view of earnings per share.
The calculation:
Diluted EPS = (Net Income - Preferred Dividends + Convertible Adjustments) / (Weighted Average Shares + Dilutive Securities)
Securities that dilute EPS:
- Stock options: Employee and executive option grants
- Restricted stock units: Unvested equity awards
- Convertible bonds: Debt that can convert to equity
- Convertible preferred stock: Preferred shares convertible to common
- Warrants: Rights to purchase shares at specified prices
Why diluted EPS matters:
- Conservative measure: Shows EPS if all potential shares are issued
- Preferred by analysts: More commonly used than basic EPS
- Dilution awareness: Highlights impact of stock-based compensation
- True ownership: Reflects the full potential share count
Key considerations:
- Anti-dilution rule: Securities that would increase EPS are excluded
- Treasury stock method: Assumes option proceeds are used to buy back shares
- If-converted method: Assumes convertibles are converted and interest is added back
Large gaps between basic and diluted EPS indicate significant potential dilution from stock-based compensation or convertible securities.