Diluted Earnings Per Share is a performance parameter of companies. It gives an idea about the quality of earnings per share of a company in a situation where all possible convertible security options have been exercised. Earnings per share measures the actual earning capacity of a company.
More on Diluted Earnings Per Share
Earnings per share is obtained by dividing the profit of the company by it’s total outstanding share. Convertible preferred shares, warrants and the other available options increase the number of outstanding shares. So the denominator of the ratio increases. Therefore, as per the formula, the earnings per share is reduced. This is a bad omen for the shareholders.
However, it is quite a conservative analysis of the situation. This may be said as each one of the investors holding convertible preferred shares, options and other similar investments, will not convert their shares at one go, in all probability.
A major difference in the values of a company’s diluted earnings per share and earnings per share points to the phenomenon of potential dilution of company shares.
Diluted earnings per-share is often considered to give a more accurate estimate of the per share total earnings figure. The former measures the company’s real earning capacity.
By convertible securities the following factors may be taken into account
convertible preferred shares
Barring the case where the company has some additional potential outstanding shares, the diluted earnings per share is less than the simple earnings per share.