Define the following terms. Basic earnings per share. Potentially dilutive security. Diluted earnings per share.
Define the following terms.
- Basic earnings per share.
- Potentially dilutive security.
- Diluted earnings per share.
Basic earning per share is the amount of a company’s earnings allocable to each share of its common stock. It is a useful measure of performance for companies with simplified capital structures. If a business only has common stock in its capital structure, the company presents only its basic earnings per share for income from continuing operations and net income.
The formula for basic earnings per share is:
Profit or loss attributable to common equity holders of the parent business ÷
Weighted average number of common shares outstanding during the period
Dilutive securities are any financial instruments that can potentially increase the number of shares outstanding. This means that such an instrument can be converted into a share of common stock. The concept is of importance when calculating fully diluted earning per share, where the effect of these securities can reduce earning per share. A reduced amount of earnings per share could drive away investors, thereby lowering the price of a company's stock.
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