Basic EPS vs Diluted EPS

Last Updated: 8 Aug 2025

When an investor is talking about earnings per share, what they mean is either basic or diluted EPS. If you want to calculate the basic EPS, you will have to divide a company’s net income after taxes by its weighted average shares outstanding. The data is taken for a particular time period only. On the other hand, diluted EPS takes into account all the potential dilution that can take place from stock-based compensation, warrants and convertible securities.

What is Earnings Per Share?

It measures the portion of net profit that is attributable to a single outstanding common share. To get the value, you will need to subtract the preferred dividends from net income and divide the result by the weighted-average number of common shares. There are two versions that you will find – the basic and the diluted. The former takes into account current common shares only, but the latter assumes all securities that are convertible. It includes options, warrants and convertible debt.

Comparing Basic EPS and Diluted EPS

Though they are similar, basic and diluted earnings per share are different concepts. The former is simply computed as the net income or profit of a firm divided by the total number of shares outstanding. The latter assumes conversion of all potentially dilutive securities, which would convert into common stock if these convertible securities were exercised or options were converted to stock.

Typically, diluted earnings per share should be used in valuing a company if you believe that there is likely to be considerable dilution due to employee stock options or other forms of equity compensation or other classes of stock or convertible debt that could be dilutive. Otherwise, future cash flows are well indicated by basic earnings per share.

A hypothetical example using basic EPS versus diluted EPS illustrates how each number differs when it comes to calculating the value for an investor. To keep things simple, let’s say that someone owns one share in Company X, which has a net income of Rs. 1 crore in year 1, and no additional debt or equity financing was required during its first year of operations.

Assume a total of 100 shares outstanding and a price per share of Rs. 10. For simplicity, let’s ignore the effects of taxes and dividends. In year 2, stock options are awarded to 50 employees with an exercise price of Rs. 5 per share. Additionally, 10 employee stock purchases were priced at Rs. 7 per share to reduce risk through diversification among all employees. These actions resulted in all 110 potential shares being diluted by 5% while net income increased by 10%. If you divide earnings by basic EPS instead of diluted EPS, you get Rs. 0.91 instead of Rs. 0.95 per share.

Using both types of earnings per share is important for an investor because they offer two views of a company’s worth.

To put it in simple terms, diluted earnings per share are nothing but a company’s net income divided by its shares outstanding. Basic EPS takes into account those particular shares that are available for trading, which may be greater than a company’s total number of outstanding shares. Now that you have a basic idea of the difference between basic and diluted EPS, let’s understand how they are calculated.

Calculation of Basic vs Diluted EPS

A stock’s earnings per share is when you divide a company’s net income by its weighted average number of shares outstanding during a given period.

Basic earnings per share are a company’s income divided by its total number of outstanding shares. It’s a useful metric when looking at a company’s profitability over time, as it accounts for one-time items and ignores what investors call extraordinary items.

Basic EPS is calculated as follows: [Net Income / Total Shares Outstanding] × 100 = Basic Earnings Per Share.

Basic EPS tells you how much money a company made on average from each share that was outstanding during a given period. For example, if Company XYZ had a net income of Rs. 100 crore last year and 10 crore shares outstanding during that time. Then, it would have basic earnings per share (EPS) of Rs. 10 (Rs. 100 crore/10 crore).

Generally speaking, diluted earnings per share uses the same number of shares outstanding as basic but adds any potential additional shares that might be issued through convertible bonds or preferred stock options.

Let’s say that a company has 100 crore fully-diluted shares outstanding with 4 crores in warrants in its treasury, giving them another 4 crores in potential shares waiting to be sold. They make a profit of Rs. 100 crore. Divided by 100 crore shares, you get earnings per share of Rs. 1 per share. But, since you added those 4 crore potential shares before taking into account any type of actual dilution, your total diluted earnings per share calculation ends up being Rs. 1.04 per share, not Rs. 1 as reported under basic EPS.

What are the Key Differences Between the Two EPS?

Aspect	Basic Earnings Per Share	Diluted Earnings Per Share
Shares counted	Only weighted-average common shares outstanding	Common shares plus all potential shares from options, warrants, convertibles, etc.
Capital-structure use	Suitable for companies with a simple structure (no major dilutive instruments)	Required for complex structures; presents “worst-case” dilution scenario
Typical value	Always higher than diluted EPS because the denominator is smaller	Always lower or equal; a larger denominator reduces per-share profit
Purpose for investors	Shows current earnings available to existing shareholders	Offers a more conservative view, highlighting possible future dilution
Sensitivity to new issuances	Unaffected by potential conversions	Reflects the impact if all dilutive securities convert, alerting investors to dilution risk
Regulatory reporting	Mandatory disclosure on the income statement (IAS 33, US GAAP)	Also mandatory when dilutive securities exist; shown alongside basic EPS
Analytical use	Often used for headline results and simple P/E ratios	Preferred by analysts for the valuation of growth firms with stock-based compensation

Basic EPS tells shareholders how much profit the company currently earns per existing common share. Its formula is straightforward:

Basic EPS = Net Income−Preferred Dividends/ Weighted-Average Common Shares

Because it ignores any future share issuance, basic EPS works best for firms with uncomplicated equity structures, typically mature companies that issue few options or convertible securities. It provides a clear, easy-to-compare snapshot of profitability but may overstate per-share earnings if significant dilution looms.

Diluted EPS adjusts that snapshot for reality’s rough edges. It assumes every in-the-money option is exercised, every warrant converted, and every convertible bond exchanged for equity. Consequently, the denominator swells, lowering the per-share figure:

Diluted EPS = Net Income−Preferred Dividends/ Weighted-Average Shares + Potential Dilutive Shares

This “what-if” lens is invaluable whenever a company extensively uses stock-based compensation, convertible debt, or preferred stock. A large gap between basic and diluted EPS warns investors that future share issuance could materially erode their ownership stake and the firm’s P/E multiple. Conversely, a narrow gap signals limited dilution risk.

Final Words

With both methods, investors need to understand which one will be reported on public financial statements and why it matters in certain situations. Knowing about basic EPS vs diluted EPS is important as it can help you make an informed decision when investing in your next opportunity.

Frequently Asked Questions

1. How is the EPS calculation affected by share buybacks?

Share repurchases reduce the weighted-average shares outstanding, which can boost both basic and diluted EPS even if net income stays flat.

2. Why is diluted EPS sometimes equal to basic EPS?

If a company has no dilutive securities or existing instruments that are anti-dilutive (would increase EPS if converted), diluted EPS will match basic EPS.

3. Can diluted EPS ever exceed basic EPS?

No. By definition, the diluted share count is greater than or equal to the basic share count; therefore, diluted EPS cannot be higher than basic EPS.