Diluted earnings per share

Earnings per share recalculated as if every instrument that can become a share already had. Employee options, convertible bonds and warrants all take a slice of future profit, and the diluted figure is the honest denominator.

Take the company earning ₹615 crore with 50 crore shares, which reports basic EPS of ₹12.30. If outstanding options would add 3 crore shares after the treasury stock method, diluted EPS is ₹615 crore divided by 53 crore, or ₹11.60. Convertible bonds need one more step: the interest the company would stop paying on conversion is added back to the numerator, after tax. That's a 5.7% haircut, and it's the number a buyer of the whole company would work from.

For a young technology firm with heavy stock compensation the gap can be far wider, and it widens again every year that new grants are made.

Use the diluted figure by default. If a company's basic and diluted numbers are far apart and only the basic one is quoted in the release, that's a choice somebody made.