Diluted EPS
Diluted earnings per share divides profit by the number of shares there would be if options, warrants and convertible securities were turned into shares. It is lower than or equal to basic EPS.
Diluted EPS shows earnings per share as if all options, warrants and convertible securities that would reduce EPS had turned into shares. It is a more conservative figure than basic EPS. Detailed rules come from IAS 33 under IFRS or from US GAAP, and reporting requirements differ by country.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Diluted earnings per share, Fully diluted EPS
- Updated
Diluted EPS in plain words
Basic EPS is net income divided by the number of shares outstanding.1
Under IFRS, companies must show basic and diluted EPS side by side, with the same prominence, in the income statement.2
Diluted EPS also counts shares that could be created — for example from options and warrants being exercised or convertible bonds being converted.2
How diluted EPS is built
Start with basic EPS
Start with basic EPS: net income ÷ shares outstanding.1
List potential shares
Include the exercise of options and warrants.2
Add convertibles
Add the shares that convertible securities would turn into.2
Adjust the numerator
Add back interest saved on convertibles, net of tax.
Exclude anti-dilutive items
Leave out anything that would raise EPS.
Read the reconciliation
Check the notes, where companies show the earnings figures used for basic and diluted EPS and how they tie back to profit.2
Worked examples
Example 1 — Basic EPS
$2.00A hypothetical company earns $10m with 5m shares.
| Net income | $10m |
| Shares | 5m |
| Basic EPS | $2.00 |
Net income divided by shares outstanding gives basic EPS.1
Example 2 — Options dilute
$1.82 dilutedThe same hypothetical company has options adding 0.5m net shares.
| Shares | 5.5m |
| Diluted EPS | $1.82 |
| Dilution | -9% |
Potential shares from the exercise of options and warrants lower EPS to $10m ÷ 5.5m ≈ $1.82.2
Example 3 — Convertible bond
$1.73 dilutedA hypothetical convertible adds 1m shares and saves $0.4m after-tax interest.
| Adjusted income | $10.4m |
| Diluted shares | 6m |
| Diluted EPS | $1.73 |
Conversion adds shares to the bottom of the fraction, while the interest no longer paid is added back to the top.2
Basic vs diluted EPS
| Aspect | Basic EPS | Diluted EPS |
|---|---|---|
| Share count | Weighted shares outstanding | Plus potential shares |
| Includes options | No | Yes, if dilutive |
| Typical size | Higher or equal | Lower or equal |
| Use | Current earnings per share | Conservative view |
Where diluted EPS is used
Valuation
Analysts use it in the Price-to-Earnings Ratio.
Comparing companies
Fairer for firms with heavy stock pay.
Earnings season
Headline Earnings per Share often quotes diluted figures.
Payout analysis
Used in the Payout Ratio.
Advantages and disadvantages
Advantages
- More conservative than basic EPS.
- Captures stock-based pay and convertibles.
- Required with equal prominence under IFRS.
- Improves comparability.
Disadvantages
- More complex to compute.
- Depends on share price assumptions.
- Excludes anti-dilutive items, which can confuse.
- Rules differ between IFRS and US GAAP.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why dilution matters
Beginner
If extra shares might be issued, each share's slice of profit gets thinner, which is why IFRS puts diluted EPS right next to basic EPS.2
Numerator and denominator
Intermediate
IAS 33 sets the rules for both parts of the fraction: the weighted average number of shares and the earnings figure, for basic and diluted EPS.2
Disclosure and standards
Advanced
Companies show which earnings figures they used and reconcile them to reported profit.2 US GAAP uses similar methods with some differences; reporting rules differ by country.
Common mistakes
Comparing basic with diluted
Use the same measure across firms.
Ignoring stock pay
Heavy option grants dilute owners.
Forgetting the numerator
Convertible interest must be added back.
Including anti-dilutive items
They are excluded by rule.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Diluted EPS counts potential shares.
- It is equal to or lower than basic EPS.
- Options, warrants and convertibles are included if dilutive.
- IFRS requires it with equal prominence.
- Rules differ by standard and country.
Frequently asked questions
Why can diluted equal basic?
Which should I use for P/E?
Are IFRS and US rules identical?
Further learning
- Earnings per Share
The basic version.
- Price-to-Earnings Ratio
Where EPS is used.
- Options
A main source of dilution.
- Earnings
The numerator.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- SEC. Beginners' Guide to Financial Statements (opens in a new tab) Checked .
- IFRS Foundation. IAS 33 Earnings per Share (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.