Basic EPS vs. Diluted EPS

Overview of the difference between EPS and Diluted EPS

Those who invest in a company or are looking for companies they can invest in look at two figures related to the financial activity of that company. These are EPS and Diluted EPS and are always in included in the financial statements of publicly traded companies. EPS is an acronym for “Earnings per Share” and it refers to the amount of money investors earn on the money they invest according to the number of shares that they own.

One simple formula that many investors use to determine these figures is that they take the net worth of a company and divide it by the number of outstanding shares. The quotient is an estimate of the earnings per share. However, there is more to determining the EPS and diluted EPS than this.

There are ways by which a company can increase the number of outstanding shares at any time. These are tools, such as stock options, warrants, convertible preferred stock and secondary equity offerings. When a company uses one of these tools, it dilutes the EPS. The earnings per share go down as the number of shares goes up and this is why it is called diluted EPS. Companies that do not have a net loss to report or that do not have any diluted securities only report one figure in their financial statements – EPS.

Every time a company increases its shares, this decreases the earning power of the rest of the shares and decreases the percentage of shares an investor has in the company. Sometimes shareholders do not notice any difference in their earnings because the difference between EPS and Diluted EPS is minimal. However, it can mean a large amount of money for the company. For example, if the difference between the EPS and the Diluted EPS was only 6 cents a share, investors will not notice very much of a difference in their earnings. But if this company had 6.5 billion outstanding shares, this tiny amount per share would translate into $300 million that the company used for other purposes. This is why it is important for investors to understand the difference between EPS and Diluted EPS before they invest.

The Diluted EPS should be the most important figure to look at when determining which companies to invest in. The value of an EPS of a company determines the cost of each share and is very important in determining the price to valuation ratio. The equity of the company plays a role as well, which is why companies with the same EPS do not necessarily mean they are equal when it comes to investing in either one. The best company to choose is the one that uses the lesser amount of equity to generate EPS. This shows you that although the EPS is important, there are other factors that come into play when deciding which investment choice to make.