Diluted EPS and other aspects of EPS

In this lesson

1. 0:00 Introduction to diluted earnings per share
2. 0:30 Convertible instruments and share dilution
3. 2:39 Calculating diluted EPS with convertibles
4. 4:30 Worked example: Preston convertible loan notes
5. 10:08 Share options and warrants explained
6. 13:50 Worked example: Spectre share options
7. 16:09 Price-earnings ratio and EPS applications
8. 17:45 Limitations of earnings per share

About this lesson

performance measure. You'll see worked examples showing how to handle time apportionment, adjust for tax effects, and apply the treasury stock method for options. By the end, you'll understand how to calculate and interpret EPS figures that alert shareholders to potential changes in their earnings per share. Diluted EPS accounts for potential future changes to share capital that could reduce earnings per share. The video explains two main sources of dilution: convertible instruments like loans and preference shares that may convert into ordinary shares, and options or warrants that give holders the right to purchase shares at a set price. For convertible instruments, you'll learn how to add back the interest or dividend savings to earnings while accounting for additional tax, then divide by the increased share count. For options, you'll discover the treasury stock method, which calculates the "free" shares being given away when the exercise price is below market value—these increase the denominator without affecting earnings. The video includes a comprehensive worked example of a convertible loan issued mid-year, demonstrating time apportionment of both interest and additional shares. You'll see how to handle preference dividends, calculate earnings after tax, and determine the maximum dilution scenario that shareholders should be aware of. The final section covers how EPS feeds into the price-earnings ratio, a key valuation metric for investors, while also highlighting important limitations: EPS reflects past performance, can be affected by accounting policy choices, and may not immediately reflect the benefits of new share issues.

Duration: 19m