Diluted Earnings per Share (Diluted EPS)
Definition of 'Diluted Earnings per Share (Diluted EPS)'
Diluted EPS is used to provide a more accurate picture of a company's profitability than basic earnings per share (EPS), which does not take into account the potential issuance of new shares. This is because the issuance of new shares would dilute the existing shareholders' ownership stake in the company, which would in turn reduce their earnings per share.
For example, if a company has 100 million shares outstanding and net income of $100 million, its basic EPS would be $1 per share. However, if the company also has $100 million in convertible debt, which could be converted into 10 million new shares, its diluted EPS would be $0.90 per share. This is because the issuance of the new shares would dilute the existing shareholders' ownership stake in the company, which would in turn reduce their earnings per share.
Diluted EPS is important for investors because it provides a more accurate picture of a company's profitability and helps them to compare companies with different capital structures. It is also used by analysts to value companies and make investment decisions.
Here are some additional points to keep in mind about diluted EPS:
* Diluted EPS is calculated using the weighted average number of shares outstanding. This number is calculated by taking the number of shares outstanding at the beginning of the period, adding the number of shares issued during the period, subtracting the number of shares repurchased during the period, and then dividing the result by the number of months in the period.
* Diluted EPS is only calculated for companies that have potential dilutive securities, such as convertible debt or stock options.
* Diluted EPS is not a GAAP-required measure. However, it is widely used by investors and analysts.
Overall, diluted EPS is an important measure of a company's profitability that takes into account the potential issuance of new shares. It is used by investors to compare companies with different capital structures and to make investment decisions.
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