What is a diluted share?

By THIS IS MONEY
Updated:

 

What is meant by diluted and adjusted share in companies' annual reports. I want to get into share dealing and analysing company reports but I'm unsure about what these terms actually mean. CM, Birmingham

Keith Bowman, equity analyst with Hargreaves Lansdown, says: 'Firstly, we need to define Basic Earnings Per Share (EPS):

This is the profit attributable to equity shareholders divided by the number of shares in issue.

Basic EPS = Profit attributable to equity shareholders/Number of shares in issue

However, then life becomes a little more complicated. Whilst many calculations are made using the number of shares in issue at the time of the financial year end, best practice is to use the 'weighted number of shares in issue over the year' – as the number of shares in issue can change greatly over a year's course.

To provide even greater accuracy, a Diluted EPS calculation is often made. Diluted EPS is a calculation made allowing for the many other types of share which a company may have in issue and which will/may eventually become ordinary equity i.e

Convertible preference shares, warrants or convertible debt. Diluted EPS, in effect, provides a better gauge of the quality of a company's earnings.

As for Adjusted EPS, adjusted EPS is a calculation made in order to make a better comparison from one year to the next. Here, a one off-profit such as the sale of a company property is excluded from the profit attributable to equity shareholders. Another example might be foreign exchange fluctuations which, have by luck, resulted in an additional profit.

In summary, dilutive calculations provide a better overall picture, taking into effect likely future events, whilst adjusted calculations are there to make sure we are comparing like with like.

Most watched Money videos