Basic Earning Per Share is the ratio, that is reckoned to know the earnings available to each equity share. It is calculated by considering company’s ordinary shares. On the other extreme, diluted earnings per share are computed when there are potential shares, i.e. convertible securities, in the company’s financial structure.
Earning per share (EPS) as its name suggests, it is that portion of the profit which is attributable to the shares outstanding. Financial Accounting Standard Board (FASB), has made it compulsory for the enterprises to report their basic and diluted EPS after every quarter. In this article excerpt, you can find all the important differences between basic and diluted EPS, in a detailed manner, take a read.
Content: Basic EPS Vs Diluted EPS
|Basis for Comparison||Basic EPS||Diluted EPS|
|Meaning||Basic EPS is a tool, that measures the profit of the firm on per share basis.||Diluted EPS is a barometer that measures the quality of earnings per share, of the company.|
|Calculation||Dividing net profit after tax by the total outstanding ordinary shares.||Dividing its net earnings by the total number of shares, which include the convertible securities in addition to ordinary stock.|
|Considers||Company's ordinary shares only.||Ordinary shares, warrants, options, convertibles and so on.|
Definition of Basic EPS
Basic EPS is a barometer that gauges company’s per share earning capacity. It measures the company’s profitability and reflects the fair price per share.
Basic EPS is calculated by dividing the net earnings or loss for the current year by total outstanding weighted average number of ordinary shares. While determining profits, entity’s incomes and expenditures are taken into account. Moreover, Tax expense, extraordinary items, interest on debentures, preference dividend are also considered during the calculation of net income.
Definition of Diluted EPS
Diluted EPS is a metric that discloses the company’s earnings per share determined by using fully diluted outstanding shares, in addition to the ordinary shares of the company. Here diluted outstanding shares refer to the total outstanding shares if all sources of conversion are exercised like warrants, convertible bonds, stock options and so on.
According to the theory, if the investments are converted in whole or in part, the shares outstanding will increase at any point in time, due to which the per share earnings of the firm will decrease.
Key Differences Between Basic and Diluted EPS
The difference between basic and diluted EPS is drawn clearly on the following grounds:
- Basic EPS is a tool that measures the profit of the firm on per share basis. Diluted EPS is a barometer that measures the quality of earnings per share, of the company.
- For calculating basic EPS, net earnings are divided total outstanding ordinary shares. Conversely, diluted EPS can be calculated by dividing its net earnings by the total number of shares, which include the convertible securities in addition to ordinary stock.
- Diluted EPS takes into account prospective dilution arising out of warrants, convertible securities, options, etc. On the other hand, basic EPS does not consider it, at the time of calculation.
- Basic EPS is higher in value than diluted EPS because net earnings remain same but the number of shares is increased in diluted EPS, due to which the earnings are comparatively less.
The calculation of basic and diluted EPS is helpful to know the company’s worth, profitability and performance. Investors are very much interested to know these two figures because if there is a huge difference between them, then no buy the shares of the company, as the dilution may decrease the per share price.