Question

Explain the difference between basic earnings per share and diluted earnings per share.

Short answer

Answer

Basic earnings per share considers just those shares that are accessible for trading, that might be higher than a company's total number of outstanding shares. Diluted earnings per share is just a company's net income divided by its outstanding shares and convertible securities.

Step-by-step solution

Introduction to earnings per share

Earnings per share calculated on a quarterly or annual basis and it describes a public company's profit per outstanding share of stock.

The difference between basic earnings per share and diluted earnings per share

Dilutive earnings per share consider all of the potentially dilutive impacts of warrants, convertibles, and other securities that can create new shares of common stock.

More specifically, Basic earnings per share only uses number of sharses of common stock to estimate the per share earning.