Diluted Normalized Earnings Per Share

Key Takeaways

• Diluted normalized EPS shows a profit per share that assumes that all potential stock is issued.
• It adjusts earnings to exclude one-time gains or expenses.
• Diluted normalized EPS helps investors gauge a company's worst case EPS.
• Analysts use diluted normalized EPS to compare company performance against industry peers.
• Big gaps between EPS and diluted EPS indicate potential earnings dilution risk.
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What Is Diluted Normalized Earnings Per Share?

Diluted normalized earnings per share refers to a company's profit per share after adjusting for one-time events, and accounting for all outstanding shares and those that could potentially be issued. Unlike regular earnings per share (EPS), diluted normalized EPS factors in convertible securities and preferred stock, as well as stock options and warrants. So it provides a worst-case view of EPS since a larger number of shares results in a lower earnings amount per share.

How Diluted Normalized EPS Provides Insight into Company Profitability

EPS is one of the most important variables used to determine a company's profitability and value each of its individual shares. Several different versions of this metric are published in financial statements and brokerage research notes, though, so it is important that investors understand what each one represents.

Normalized earnings are profits that have been adjusted to exclude the effects of seasonality, irregular items such as non-recurring expenses, or one-time gains such as from the sale of a division. Adding dilution to this equation then assumes all convertible securities (investments that can be changed into common stock) have been exercised.

Important

Big gaps between normalized EPS and diluted normalized EPS signal a greater risk of potential earnings dilution, as a large increase in the number of shares on the market means fewer earnings to go around.

Including all of a company's potentially outstanding shares increases earnings dilution to shareholders by spreading a company's profit over a larger number of shares. As a result, while a company's diluted normalized EPS might occasionally be similar to its basic EPS, in cases where the company is large and established it will almost always be lower.

Along with other measures of profitability, analysts and investors typically track a company's diluted EPS over time, comparing it against industry peers for valuation purposes.

Advantages of Analyzing Diluted Normalized EPS

Calculating diluted EPS figures based on normalized earnings, excluding one-time events, gives a truer picture of underlying profitability. This particular metric is often overlooked, despite providing a more conservative yardstick for analysis, valuation and investment comparisons than headline EPS, which is a company's earnings based solely on operational and capital investment activities.

Investors focus on diluted EPS because the number gives a clearer picture of a company's income. The more closely a company's diluted normalized EPS tracks its EPS figure, the more stable its profitability per share. The greater the difference, the greater the risk of share dilution and unsustainable ongoing operations.

Comparing the two numbers can alert analysts and investors to potential developments likely to result in lower-than-expected shareholder earnings and dividend payouts. Looking at diluted normalized EPS can also help pinpoint a company with a large number of convertible securities and large stock option issuance.