BAJAJ FINSERV DIRECT LIMITED

Our Products

Loans

Cards

Insurance

Investment

Stock Market

Electronics Mall

CIBIL Score

Knowledge Centre

Calculators

Stocks Insights

Basic EPS vs Diluted EPS: Meaning, Formula & Key Differences

Anshika

Discover the difference between Basic EPS and Diluted EPS and understand how each metric reflects a company’s earnings strength and potential share dilution.

Earnings Per Share (EPS) is one of the most widely used profitability metrics among investors, analysts, and financial institutions. It indicates how much profit a company generates for each outstanding share. However, EPS is not a single measure—two variations exist: Basic EPS and Diluted EPS. Understanding the difference between the two is essential for analysing a company’s performance accurately, assessing shareholder value, and evaluating potential future dilution.

What Is EPS (Earnings Per Share)

EPS measures how much net profit a company earns for each share of common stock.
It is calculated by dividing net income by the total number of shares.

EPS helps investors understand profitability on a per-share basis, making it easier to compare companies regardless of size.

What Is Basic EPS

Basic EPS represents the earnings available to each existing common share.

It uses the current outstanding shares and does not consider the possibility of future share dilution.

Formula for Basic EPS:

  • Basic EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding

What It Represents

  • Profitability per existing share

  • Typically used for companies without convertible securities

  • Simple and straightforward profitability indicator

How to Calculate Basic EPS

To calculate Basic EPS, follow these steps:

  1. Start with Net Income from the income statement

  2. Subtract Preferred Dividends (if any)

  3. Divide the result by the weighted average number of common shares outstanding during the reporting period

This weighted average adjusts for share issues or buybacks within the year.

What Is Diluted EPS

Diluted EPS accounts for all potential shares that could be created if convertible instruments were exercised. These potential additions to the share count are known as dilutive securities.

Common Dilutive Securities

Formula for Diluted EPS

Diluted EPS =  (Net Income – Preferred Dividends) / (Weighted Average Shares Outstanding + Dilutive Potential Shares)

Diluted EPS is almost always lower than Basic EPS because it assumes more shares are created, spreading profits over a larger base.

How to Calculate Diluted EPS

Here’s how to calculate Diluted EPS:

  1. Compute Basic EPS

  2. Identify all outstanding dilutive securities

  3. Convert these securities into their share equivalents using the appropriate accounting method (e.g., treasury stock method, if relevant)

  4. Add these potential shares to the current outstanding shares

  5. Recalculate EPS with the higher share count

This provides a more conservative figure and reflects potential dilution.

Basic EPS vs Diluted EPS: Key Differences

Consider the following differences:

Aspect Basic EPS Diluted EPS

Shares considered

Only existing outstanding shares

Existing shares + potential future shares

Reflects dilution?

No

Yes

Accuracy

Less conservative

More conservative and realistic

Use case

Firms without convertible securities

Firms with stock options, warrants, or convertible debt

Value

Usually higher

Usually lower

Investor perspective

Indicates current profitability

Shows future earnings impact due to dilution

Diluted EPS provides a clearer view of risks, especially in companies that issue a large amount of stock-based compensation.

Example of Basic and Diluted EPS

Consider the illustration given below,

Assume the following:

  • Net Income = ₹10,00,000

  • Preferred Dividends = ₹1,00,000

  • Weighted Average Shares = 2,00,000

  • Potential Dilutive Shares = 40,000

Basic EPS

= (10,00,000 – 1,00,000) ÷ 2,00,000
= ₹4.50 per share

Diluted EPS

= (10,00,000 – 1,00,000) ÷ (2,00,000 + 40,000)
= ₹3.75 per share

As expected, Diluted EPS is lower because potential shares reduce the per-share profitability figure.

Importance of Basic and Diluted EPS

Here’s why each of these are important for investors:

Why Basic EPS Matters:

  • Shows current profitability

  • Helps compare companies on equal footing

  • Used for basic valuation metrics such as P/E ratio

Why Diluted EPS Matters

  • Indicates future dilution impact

  • Helps investors assess the effect of employee stock compensation

  • Required for companies with complex capital structures under accounting standards

Investors often prefer Diluted EPS because it is the more conservative and future-focused measure.

Conclusion and Key Takeaways

Earnings per share is one of the most widely used indicators of a company’s profitability. Understanding the difference between basic and diluted EPS helps assess how current earnings compare with potential future dilution. This distinction becomes especially important for companies that issue options, warrants, or convertible securities, as it affects long-term valuation and earnings quality.

Key points to remember:

  • Basic EPS reflects current profitability based on existing shares only.

  • Diluted EPS includes potential shares from convertibles and stock options.

  • Companies with convertible instruments must report both figures.

  • Diluted EPS is usually lower and offers a more conservative view.

  • Both metrics help evaluate earnings strength and dilution risk.

Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

What is the difference between basic EPS and diluted EPS?

Basic EPS reflects earnings attributable to each currently outstanding share, while diluted EPS incorporates all potential shares from options, convertibles, and other dilutive instruments to show the impact of possible dilution.

How is basic EPS calculated?

Basic EPS is calculated using the formula:
(Net Income – Preferred Dividends) ÷ Weighted Average Shares Outstanding.
It represents earnings per existing share without considering any convertible securities.

How is diluted EPS calculated?

Diluted EPS is derived by dividing (Net Income – Preferred Dividends) by the sum of Weighted Average Shares and all potential dilutive shares, offering a more conservative view of per-share earnings.

Why is diluted EPS usually lower than basic EPS?

Diluted EPS tends to be lower because the inclusion of potential additional shares spreads the same earnings over a larger share base, reducing earnings per share.

What affects the difference between basic and diluted EPS?

The gap between the two metrics is influenced by the volume of outstanding stock options, convertible bonds, restricted stock units, and other instruments that could increase the total number of shares.

Why is EPS important in financial analysis?

EPS is vital because it helps assess profitability, enables comparison across companies, supports valuation metrics, and highlights the impact of dilution on shareholder earnings.

Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

Home
Steal Deals
CIBIL Score
Free Cibil
Accounts
Explore