November 18, 2025
4 mins read
Diluted EPS, or Diluted Earnings Per Share, tells you how much money a company makes for each share, but in a different way. It thinks about every possible share that could be out there in the future.
This includes money from stock options, convertible bonds, and warrants. If these were changed into regular shares, the total number of shares would go up, which could affect earnings per share.
When you look at Diluted EPS, you're basically seeing a careful version of how much money a company makes. It gives you an idea of what earnings may look like if every potential share were issued. This is a realistic picture, not an ideal one.
When you look at a company's Diluted EPS, you're seeing how much money each share would make if all of the shares were issued. These extra shares could originate from:
Bonds that can be changed
Options for employees to buy shares
Warrants
Preferred stock that can be changed into common stock
So, why is this important? If a corporation has a lot of shares that could be converted, its Diluted EPS will probably be lower than its Basic EPS. This arises because more shares get the same amount of profit.
Diluted EPS tells shareholders how fresh share offerings could lower their portion of profits or dividends. If there is a big difference between Basic and Diluted EPS, it means that investors might not make as much money in the future if those convertible securities are turned into real shares.
You have to change the Basic EPS to take into account possible shares in order to find the Diluted EPS. This is the formula:
Diluted EPS = (Net Income - Preferred Dividends) / (Weighted Average Shares Outstanding + Possible Dilutive Shares)
Let's go over the steps to figure it out now:
Find the Basic EPS first. Take out preferred dividends from net income. After that, divide the rest of the earnings by the weighted average number of common shares that were available during the time.
Look for shares that could be made later, like stock options, warrants, or convertible bonds. These shares could be dilutive since they could increase the overall number of shares.
Add those shares that could be diluted to the weighted average shares that are already there. This provides you a new total number of shares that you can use to get a correct Diluted EPS.
To get the new total number of shares, divide the adjusted earnings by that amount. The outcome is the Diluted EPS, a cautious way to see how future share conversions could affect profits per share.
You can see how dilution affects a company's earnings per share by following these steps. It also helps you figure out how future share conversions can affect your returns.
Let's say that LMN Ltd. made a net profit of ₹2,50,000 throughout the fiscal year. The corporation also paid out ₹40,000 in preferred dividends during this time. LMN Ltd. has 300,000 common shares that are still out there and has given out 60,000 stock options at a price of ₹20 per share. The price of LMN Ltd.'s stock on the market right now is ₹35 per share.
This is how the basic EPS will be figured out:
Basic EPS = Net Income / Total Common Shares Outstanding = ₹2,50,000 / 300,000 = ₹0.83 per share
This is how to figure out diluted EPS:
Diluted EPS = (Net Income - Preferred Dividends) / (Weighted Average Shares Outstanding + Dilutive Securities)
= (₹2,50,000 - ₹40,000) / (300,000 + (60,000 × (₹35 / ₹20)))
= ₹2,10,000 / (300,000 + 1,05,000) = ₹2,10,000 / 405,000 = ₹0.52 per share
This math demonstrates that LMN Ltd.'s diluted EPS is about ₹0.52 per share, which takes into account the possibility of dilution from stock options that are still available. There is a big gap between this number and the Basic EPS of ₹0.83 per share. This shows how dilutive securities can affect a company's earnings per share.
Convertible Bonds: Diluted EPS usually goes down when a corporation has a lot of convertible bonds or preferred shares. This arises because conversions add additional shares, which means that gains are spread out over a bigger base.
Warrants and Stock Options: When employees or investors use their stock options or warrants, additional shares are available to buy. This increase in the number of shares automatically lowers Diluted EPS.
Net Profit: A corporation can make up for the dilution effect by making more money. Diluted EPS is pretty stable, even with more shares, because of a bigger net income.
Preferred Dividends: Preferred dividends lower the amount of money that common shareholders can make. This means that less money is given out per share, which lowers the overall EPS.
Splits in stock: When a company splits its stock, it makes more shares available. Even though the price of each share goes down, Diluted EPS may still go down a little following the split.
Buying back: When a firm buys back its own shares, the number of shares it holds goes down. This can assist in increasing Diluted EPS by spreading profits over fewer shares.
The state of the market: If the price of shares goes up, investors might turn their options or bonds into shares. This makes the number of shares go up, which can lower Diluted EPS.
Gives a Realistic View: If all convertible instruments were transformed into shares, diluted EPS would display how much each share could make. It lets you see how your earnings can go down because of dilution.
Main Points Risk of Share Dilution: If there is a substantial difference between Basic EPS and Diluted EPS, it suggests the corporation has a lot of convertible instruments. This means that there is a chance of dilution, which might diminish your portion of dividends and profits.
Helps figure out how ownership affects things: You can see how future share conversions can affect your holdings by keeping an eye on Diluted EPS. It also shows how steady and flexible the company's profits actually are.
Criteria | Diluted EPS | Basic EPS |
What it Measures | Looks at all the possible shares that could be issued. | Only looks at the shares that are already out there. |
Effect on EPS | EPS is lower since there are more shares. | EPS is higher because it doesn’t include possible shares. |
Purpose | Shows the worst possible outcome for earnings per share. | Shows how much money each share is making right now. |
Calculation | Includes all convertible securities that could become shares. | Does not include possible shares. |
Focus on Investors | Helps investors figure out how share dilution may affect them. | Focuses on current earnings per share, without any possible dilution. |
Diluted EPS is an important financial measure that lets you see how possible share dilution could affect your earnings per share. It looks at all the many types of shares that could be issued, like convertible bonds, stock options, and warrants.
When you look at Diluted EPS and Basic EPS side by side, you can see how much money the company would make if the worst-case dilution happened. This helps you make better selections about where to put your money in the stock market, especially if the company has a lot of convertible securities.
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Diluted EPS shows the earnings per share after accounting for all potential shares that could be issued through convertible securities, stock options, and warrants.
You calculate diluted EPS by dividing the adjusted net income by the sum of existing shares and potential dilutive shares.
While basic EPS considers only the current shares outstanding, diluted EPS includes possible shares from convertible securities.
Diluted EPS helps you assess the potential impact of share dilution on your earnings per share, providing a more conservative view of profitability.
No, diluted EPS is always equal to or lower than basic EPS because it includes more shares in the calculation.
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