Owners hold shares, so profit per share is the unit that matters in the end. It's also the most-watched single number in markets. Two versions are mandated. Ind AS 33 mirrors IAS 33, and US GAAP's ASC 260 is aligned in essentials.
Basic EPS.
Basic EPS = (Net income attributable to owners − preferred dividends) ÷ weighted-average common shares outstanding
Two mechanics matter here. First, subtract preferred dividends, since basic EPS belongs to common shareholders. Second, weight the shares by time. Say a company with 100 cr shares issues 20 cr more on 1 October, and its year ends 31 March. The new shares existed for 6 of 12 months, so the weighted average = 100 + 20 × 6/12 = 110 cr. Buybacks weight in reverse from the buyback date. There's one exception. Bonus issues and stock splits create no new resources, so they apply retroactively to all periods presented. A 1:1 bonus doubles every comparative year's count, which halves prior EPS for comparability.
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What is diluted EPS and how is it calculated?
Diluted EPS is the "what could I be diluted down to" number. Companies carry live claims that can become common shares. Employee stock options and RSUs are claims like this. So are warrants and convertibles. Diluted EPS asks what EPS would be if every in-the-money claim converted. It's the fair denominator, and the analyst's default.
The treasury-stock method (TSM) handles options, warrants, and unvested share awards. Start with the intuition. When an option holder exercises, the company isn't handing over shares for free. It receives the exercise price in cash. The TSM assumes the company uses that cash to buy back shares at the period's average market price, so only the net new shares count:
Incremental shares = N × (1 − exercise price ÷ average market price)
Take an example together. There are 8 cr options with an exercise price of ₹250, and the average market price is ₹400. Assumed proceeds = 8 × 250 = ₹2,000 cr. Shares bought back = 2,000 ÷ 400 = 5 cr. So incremental shares = 8 − 5 = 3 cr, or equivalently 8 × (1 − 250/400) = 3.
Notice the lever. The deeper in the money the option, with exercise far below market, the closer the dilution gets to the full option count. An at-the-money option adds nothing yet. Out-of-the-money options, where exercise > market, are antidilutive, so they're excluded. RSUs have an exercise price of zero, so they dilute nearly one-for-one. Under US GAAP, unrecognized compensation cost counts as assumed proceeds and trims the count slightly. That's a refinement to recognize this week, not to memorize.
The if-converted method handles convertibles. Assume conversion at the start of the period. The interest saved, net of tax, returns to the numerator. The conversion shares join the denominator. Try it on a convertible debenture of ₹500 cr at 6%, tax 25%, converting into 4 cr shares. Numerator relief = 500 × 6% × (1 − 0.25) = ₹22.5 cr. The per-share effect = 22.5 ÷ 4 = ₹5.625. If basic EPS is ₹4.00, including this claim would raise EPS, so it's antidilutive and excluded.
Antidilution rules govern everything else. Each potential-share series is included only if it reduces EPS, and diluted EPS can never exceed basic. In a loss year, all potential shares are antidilutive because they'd shrink the loss per share, so diluted EPS equals basic EPS.
How big is the gap between basic and diluted EPS?
It helps to calibrate against real filings. Apple's FY24 gap was basic ~$6.11 vs diluted ~$6.08, about half a percent. That's typical of a mature RSU-payer that buys back stock, and Infosys's gap is thinner still. Dilution really bites at convertible-heavy companies and young companies loaded with options. A 5 to 15% gap changes valuations, and Phase 3 will insist you value per diluted share. Market cap uses yet another count: shares outstanding today plus in-the-money dilution. The equity module ahead finishes that story, along with SBC.