Question

15. For the earnings per share (EPS) metric used by corporations to characterize financial performance, what do the terms “adjusted” and “diluted” mean?

Answer 1

The earnings used in adjusted EPS is usually adjusted- reversing the effect on profits of exceptional items and other one-offs such as impairments. These are excluded because they do not help investors estimate future cashflows.

The calculation of Diluted EPS includes all convertible securities which can be exercised. Convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options, and warrants. Weighted average of all these convertible securities are taken to calculate diluted EPS. Diluted EPS is calculated by dividing a company's net income minus preferred dividends by any securities that can be converted to common shares and hence is always less than or equal to basic EPS.

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