What is the Importance and Benefit of Basic and Diluted Earnings per Share?

Because of the buying and selling of shares in the modern business world, many people day by day research about them and everything related to it. The main interest in this is none other than the profits and earnings that provides the acquisition of certain shares.

There is no doubt that new types of market strategies increasingly require a greater breadth of knowledge when doing or building businesses. Being all part of an important organizational culture of companies that allows anyone to be successful through good organization.

Although the current trend is to invest and bet on the advantages that technology offers in the economy and industry as something safe. Do not miss out on studying very well all the profits and earnings guaranteed by the shares.

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Basic and diluted earnings per share

It can also be known as earnings per share, yield per share and investments or, in this case, earnings per share. It is nothing more than a meter that is used within the field of analysis of a balance sheet, it will measure the profitability per shares around a pre-established period.

This is how this main measure determines the accounting profit that would be assigned to each share that a company conforms to. This is how you have an average metric to make references or comparisons with other companies, investments or go further, including the historical behavior of the company in question.

It is at this point that it becomes relevant to explain the denomination of basic earnings per share. This is so because the numerator is equivalent to the net share without any type of adjustment, as the denominator would only take into account the number of shares that are circulating, leaving aside the effects of the share dilution.

However, what does dilution of action mean? Or put another way, the diluted earnings per share. These benefits are a variant of the previous concepts that are essentially an element for the calculation, since in addition to the existing ordinary shares, those that could come into existence are taken into account.

Uses of basic and diluted earnings per share indicators

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Once the theory is understood, it is time to ask the question of at what moment or scenarios would these indicators be used? One of the most frequent uses that is usually given to this indicator is when it is part of the calculation that is carried out in the Price Profit Ratio, this calculation allows comparisons between companies to give a fair value to the company.

The second use that can be mentioned of the earnings indicators for basic and diluted shares is that it allows to know the profitability of the shareholder in question.

How are basic and diluted earnings per share calculated?

Of a very simple way, the earnings or basic earnings per share are calculated by making a dividend of the company’s earnings, within a previously selected period. Enter the number of current shares that would constitute the capital stock.

The time frame mentioned above can be quarterly, taking into account the basic earnings per share for the quarter between the average of the outstanding shares. However, the averages of the shares that are in circulation would correspond to the results obtained in the shares that are in circulation during the beginning of the quarter, adding the shares that are circulating at the end of the quarter divided in two.

In addition, there may also be annual time periods, where the basic 12-month earnings per share are divided by the average number of shares outstanding. In this case, in the case of the average of shares, the amounts will be taken into account at the beginning and at the end of the period.

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