Question

1. explain why investors should be more interested in the Diluted EPS number than the Basic EPS number.

Answer 1

DILUTED E.P.S ARE CALCULATED WHEN THERE ARE POTENTIAL ORDINARY SHARES IN CAPITAL STRUCTURE OF THE COMPANY.

(POTENTIAL ORDINARY SHARES ARE THOSE FINANCIAL INSTRUMENTS WHICH ENTITLE TO ITS HOLDER THE RIGHT TO ACQUIRE ORDINARY SHARES LIKE CONVERTIBLE DEBENTURE, CONVERTIBLE PREFERENCE SHARES,OPTIONS, WARRANTS ETC.)

BASIC E.P.S MEASURES ONLY HOW MUCH A COMPANY EARNS PER SHARE WITHOUT GOING TO ANY OTHER DETAILS (IT DOES NOT CONSIDER CONVERTIBLE SECURITIES...)

CONSIDERATION OF CONVERTIBLE SECURITIES ARE VERY IMPORTANT FROM THE POINT OF VIEW OF INVESTORS

WITH THE HELP OF DILUTED EPS DATA INVESTOR CAN DETERMINE HOW WOULD BE THE EPS IF CONVERTIBLE SECURITIES WERE CONVERTED IN TO STOCKS. (IT PROVIDES WORST SCENARIO FOR EPS)