Diluted Earnings Per Share

Every business cannot be profitable and every businessman cannot be a legend. Though this statement has not been made to discourage you, this is a fact! Just go through the performance of companies listed on the stock market and you will find that very few of them are actually capable of posting exceptional profits. Identifying these highly successful companies is of prime importance for retail as well as institutional investors. The diluted earnings per share is one such parameter which needs to be studied carefully before you take any stock investing or stock trading decision. Before we understand the concept of diluted earnings per share, let us first know what is basic earnings per share ratio in the next section.

Meaning of Earnings Per Share

Profit maximization is the main aim of any business firm. Whether the firm is able to achieve its objectives is known from the earnings per share number. First of all, to calculate the earnings per share, we must be aware of the net profit made by the firm. This can be calculated by subtracting the expenses, taxes and depreciation from the total turnover of the company. Every profitable company pays dividends to its shareholders and these are paid on a per share basis. To calculate the EPS using the earning per share formula, you need to subtract the dividends paid from the net profit. Then, by dividing it by the shareholder equity, you get your final answer. The formula given below will help you know how to calculate earnings per share.

Earnings Per Share (EPS) = Net income - Dividends paid/Average outstanding shares.

The more the earnings per share of a company, the more will be its profitability and this would be the best parameter to invest in such companies. You can compare the earnings per share of a particular company to the other companies in the same sector and choose the finest one form them which can give you a great stock appreciation in terms of price. Apart from the earnings per share, you also need to consider other factors such as total turnover, industry position of the firms and its market share. Now, in the next section, let us know what is diluted earnings per share.

Meaning of Diluted Earnings Per Share

While you calculate the diluted EPS, you have to take into consideration the warrants or convertible shares in the number of the total outstanding shares. So, there will be a slight modification in the earnings per share formula. The number of shares in the outstanding shares place would definitely changed once the management has exercised all the preferred stock bonds, convertible bonds, stock options as well as warrants. In this way, by substituting the right number after taking into consideration the above factors in the place of the outstanding shares number, you can calculate the diluted earnings per share easily.

Earnings per share is basically of three types - trailing EPS, forward EPS and current EPS. While trailing EPS is dependable on the previous years' numbers, the current year EPS numbers are the projections of the current financial year. On the other hand, forward EPS is calculated to estimate the earnings growth of the company in the upcoming future. Stock market analysts use diluted earnings per share for stock research and assigning price targets to stocks by considering the fundamental performance of the companies.

Hopefully, this article on diluted earnings per share will help you to distinguish the profitable companies from the loss making ones easily. So, use this information carefully and locate quality stock. Good luck!