Diluted Earnings Per Share

Diluted Earnings Per Share

Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted shares outstanding (i.e. including the impact of stock option grants and convertible bonds). Diluted EPS indicates a "worst case" scenario, one in which everyone who could have received stock without purchasing it directly for the full market value did so. [cite web |title=Diluted Earnings Per Share (Diluted EPS) |publisher=Investopedia ULC |url=http://www.investopedia.com/terms/d/dilutedeps.asp |accessdate=2008-03-02]

To find diluted EPS, basic EPS is calculated for each of the categories on the income statement first. Then each of the dilutive securities are ranked based on their effects, from most dilutive to least dilutive and antidilutive. Then the basic EPS number is diluted one by one by applying each one, skipping any instruments that have an antidilutive effect. [cite web |title=U.S. GAAP Earnings per Share (EPS) |date=2007 |url=http://accountinginfo.com/study/fs/eps-01.htm |accessdate=2008-03-02]

Calculations

Calculations of diluted EPS vary. Morningstar reports diluted EPS "Earnings/Share $", which is net income minus preferred stock dividends divided by the weighted average of common stock shares outstanding over the past year; this is adjusted for dilutive shares. [cite web |title=Earnings/Share $ - Morningstar.com Glossary E-F |publisher=Morningstar |url=http://search.morningstar.com/Glossary/Glossary_E_F.html |accessdate=2008-03-02] [cite web |title=Diluted EPS - Morningstar.com Glossary D-D |publisher=Morningstar |url=http://search.morningstar.com/Glossary/Glossary_C_D.html |accessdate=2008-03-02] Some data sources may simplify this calculation by using the number of shares outstanding at the end of a reporting period. [cite web |title=Earnings Per Share (EPS) |publisher=Investopedia ULC |url=http://www.investopedia.com/terms/e/eps.asp |accessdate=2008-03-02]

International financial reporting standards

Under International Financial Reporting Standards, diluted earnings per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential common stock. cite web |title=Summaries of International Financial Reporting Standards: IAS33 Earnings per share |publisher=Deloitte Touche Tohmatsu |date=2008 |url=http://www.iasplus.com/standard/ias33.htm |accessdate=2008-03-02] Dilutive potential common stock includes:
* convertible debt
* convertible preferred shares
* share warrants
* share options
* share rights
* Employee Stock Purchase Plans
* contractual rights to purchase shares
* contingent issuance contracts or agreements

ee also

*PEG ratio

References


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