Basic Earnings Per Share is the ratio, that is reckoned to know the earnings available to each equity share. It is calculated by considering company’s ordinary shares. On the other extreme, diluted earnings per share are computed when there are potential shares, i.e. convertible securities, in the company’s financial structure.
Basic EPS is a tool that measures the profit of the firm on per share basis. Diluted EPS is a barometer that measures the quality of earnings per share, of the company.
For calculating basic EPS, net earnings are divided total outstanding ordinary shares. Conversely, diluted EPS can be calculated by dividing its net earnings by the total number of shares, which include the convertible securities in addition to ordinary stock.
Diluted EPS takes into account prospective dilution arising out of warrants, convertible securities, options, etc. On the other hand, basic EPS does not consider it, at the time of calculation.
Basic EPS is higher in value than diluted EPS because net earnings remain same but the number of shares is increased in diluted EPS, due to which the earnings are comparatively less.
