Calculation of Basic EPS vs. Diluted EPS:

The formula for calculating EPS is as follows:

Basic EPS = (Net income – Preferred dividend) / Outstanding common shares

For example, if a company made a net profit of Rs 50 crore and had 1 crore shares outstanding, the EPS would be Rs 50 per share. But there's a catch in this formula. Only outstanding shares include in the basic EPS. Other forms of stock dilution can be available to a company. A corporation could, for example, have issued securities that would result in stock dilution if executed. The corporation may also have sold convertible debentures, which, if exchanged, would increase the number of outstanding shares. When measuring diluted EPS, all possible causes of equity dilution considered. As a result, diluted earnings per share (EPS) provides a detailed view of a company's actual earnings per share. 

Previously, businesses were not required to report diluted EPS. However, the diluted EPS is still visible in every financial statement of the firm.

The method for calculating diluted EPS is:

Diluted EPS = (Net income + convertible preferred dividend + debt interest) / All convertible securities plus common shares

To measure diluted EPS, all possible securities, such as any financial instrument that may result in more shares in the future, must be identified. The following are examples of potential ordinary shares:

1. Warrants and stock options.

2.Bonds that can convert.

3. Preference stock with a conversion option.

Employee perks such as stock options enable the buyer to purchase common shares at a fixed time and amount. Convertible preferred stock and convertible bonds are similar in that they can be converted into common securities at the time and expense stated in the agreement.

Application of basic EPS vs. diluted EPS:

The EPS is used to calculate the P/E ratio, which operates to determine the company's value. As a result, accurate EPS estimation is essential.

Basic EPS is less analytical than diluted EPS.

Diluted EPS is more beneficial for fundamental research because it accounts for all possible stock diluters. It ensures that the company's EPS keeps pace with its potential development. As a result, it is more critical for the P/E estimation.

Except where there is substantial dilution in a business, basic EPS serves the function much of the time. Then diluted EPS is a better option.

Differences between basic and diluted EPS:

The below are some of the main distinctions between simple and diluted EPS:

1. While useful, simple EPS is not a reliable indicator of a company's financial health. Diluted EPS is a more stringent method of determining a company's financial health.

2. As opposed to diluted EPS, basic EPS is a straightforward test.

3. Companies with a simplistic capital structure use basic EPS, whereas companies with more complicated capital structures use diluted EPS. Since most big corporations have potential diluters, diluted EPS is more important to them.

4. Diluted EPS is often smaller than simple EPS when the denominator for diluted EPS includes all convertible shares and common shares.

5. While basic EPS ignores the impact of equity dilution on earnings, diluted EPS does.

Comparative table of basic and diluted EPS:

Conclusion

Knowing both simple and diluted EPS allows you to understand the company's financial stability better. If the company's capital structure is complicated, it's always best to compute them.