What is the explanation behind the concept where if diluted EPS is more than basic EPS, the diluted EPS will be equal to basic EPS?
Thanks in advance!
Think of basic EPS as a ceiling. The dilution effect of warrants and other things outstanding should reduce the EPS because it’s a potential or effective increase in the shares outstanding (more slices in the same pie).
If someone were to “activate” all the potential shares then your current EPS would drop, all else constant, because the same earnings number is available to more shares (more or less). It is somewhat illogical to conclude for a given earnings that more shares outstanding somehow increases your “return” (measured in EPS), so you should think of this as “at most I have regular EPS, and if the shares outstanding suddenly increases I would have less earnings per share.” Just because a calculation gives a certain number doesn’t mean there is logical meaning to it, so we must interpret it!
Doesn’t require formulas for my explanation, but not as rigorous as you could make this argument. S2000 might have some additional things for you if he stops by this thread.
Fully diluted means lowest possible.
If converting potentially dilutive securities results in a higher EPS, then it’s not the lowest possible.
That’s pretty much it.