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L.11 · INTERMEDIATE · 2 MIN

EPS and Dilution: The Most Watched Number on Wall Street

Earnings Per Share is the single most watched performance metric for public companies. Every earnings announcement leads with EPS, and missing consensus can move stocks 10%+ in seconds.

Quiz · 5 questions ↓

Live earnings per share and price

AAPL — EPS (TTM), Share Price. Open AAPL on the Ledge to see current values.

The basic earnings per share formula

Basic EPS = Net Income / Weighted Avg Shares Outstanding

Basic versus diluted earnings per share

MetricWhat It IncludesWhen to Use
Basic EPSOnly current outstanding sharesSimple view, may overstate per-share earnings
Diluted EPSAdds potential shares (options, convertibles)More conservative, preferred by analysts

Why valuation uses diluted earnings per share

Always use diluted EPS for valuation. A company with $1B net income and 500M basic shares looks great at $2 EPS. But if 200M options are in-the-money, diluted EPS is $1.43. That changes the P/E significantly.

Why the source of earnings-per-share growth matters

EPS growth is what drives stock prices over the long run. But earnings quality matters: EPS boosted by buybacks (fewer shares) is less valuable than EPS boosted by genuine profit growth.

Counting dilution from options and convertibles

Company X has 100M basic shares outstanding. It also has 10M stock options (strike $50) and 5M convertible bonds (convertible at $40). Stock at $60. Diluted EPS denominator?
Check your understanding

Sit with the ideas.

A company has net income of $800M, 200M weighted average shares, and 20M stock options outstanding with an exercise price of $40. The average stock price is $60. Using the treasury stock method, what is diluted EPS (approximately)?

Why:
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Other lessons in this course.

  1. 01Accrual vs Cash Accounting
  2. 02Depreciation: Spreading the Cost of Assets
  3. 03Stock-Based Compensation: The Hidden Cost
  4. 04Adjusting Entries: Why Period-End Matters
  5. 05Revenue Recognition: The ASC 606 Five-Step Model
  6. 06Bad Debts: When Customers Don't Pay
  7. 07Inventory: FIFO vs. LIFO and Why It Matters
  8. 08PP&E Deep Dive: Four Depreciation Methods and Asset Disposal
  9. 09The Cash Flow Statement: Follow the Actual Money
  10. 10DuPont Analysis: Decomposing Return on Equity
  11. 11EPS and Dilution: The Most Watched Number on Wall Street— reading now
  12. 12Deferred Taxes: Why Tax Expense Differs from Taxes Paid
  13. 13Lease Accounting: The Hidden Debt That Isn't Hidden Anymore
  14. 14Straight-Line Rent: Why Escalating Rent Is a Level Expense
  15. 15Deferred Rent: The Liability Straight-Lining Creates — and Where ASC 842 Put It
  16. 16Prepaid Rent: Why Paying the Landlord Early Creates an Asset
  17. 17Lease Disclosures: The Footnote Behind Every Lease Number
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