Diluted Earnings Per Share - Explained
What are Diluted Earnings Per Share?
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Table of ContentsWhat are Diluted Earnings Per Share?How is the Diluted Earnings Per Share Used?Significance of EPSCommon Dilutive SecuritiesAcademic Research on Diluted Earnings Per Share - Diluted EPS
What are Diluted Earnings Per Share?
The basic earnings per share of a company refer to the earnings made on the shares of its stock. This metric takes into account the net earning/income of a company and the total number of outstanding shares the company has. Diluted Earnings Per Share (Diluted EPS) is a measure of a company's earnings if all its convertible securities were exercised. Diluted EPS accounts for how much profit a company will make if all of its convertible securities are diluted or exercised. Unlike basic earnings per share that only accounts for existing common stock, diluted EPS accounts for convertible preferred shares, convertible bonds, warrants, stock options, and others.
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How is the Diluted Earnings Per Share Used?
Securities that are not common stock, but when converted, they become common stock are called convertible securities of stocks. Diluted EPS highlights how much earnings a company would make if all its convertible securities are exercised. Oftentimes, the Diluted EPS of a company is lower than the basic EPS, although there are certain exceptions.
Significance of EPS
Diluted Earnings Per Share (Diluted EPS) is an important metric that helps in identifying the financial status and health of a firm. It accounts for how much income a company would have when its convertible securities fae exercised. Diluted EPS is an essential metric for measuring the financial stamina f a company, this is why the Securities and Exchange Commission (SEC) requires that companies report their diluted EPS. Not all companies convert their convertible into common stock but they are still required to report their basic EPS and the diluted EPS so as to determine how healthy the company is financially.
Common Dilutive Securities
When a company's convertible securities are exercised, have effect of the Diluted EPS and the basic EPS of a company. The most common dilutive or convertible securities are highlighted below;
- Stock options: This is a benefit that an employee receives from an employer. This is an option that if exercised, allows an employee to purchase the stock of a company at a discounted price.
- Convertible preferred stock: This refers to preferred shares that can easily be converted into common shares at a predetermined date.
- Convertible bonds: These are otherwise called bonds debenture, they are bonds that can be converted into a number of a company's shares at a specific time.
Academic Research on Diluted Earnings Per Share - Diluted EPS