When calculating EPS for public market investing purposes, do you calculate basic or diluted shares outstanding? Also, do investors focus on GAAP EPS or adjusted EPS?
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You'd definitely want to look at diluted EPS if you expect exercise to occur. Generally the difference is not going to be too substantial for an established company. But you can easily imagine a scenario in which it makes a tremendous difference in what you as an investor are going to hold a claim to. If you have a company w/ 1M shares outstanding, $10M earnings, stock price is 15x basic EPS = $150, 15x P/E maybe sounds like a great deal..except a month from now 1M warrants w/ strike $5 are going to vest and be exercised, then you definitely care because the holders of those warrants are about to get claim to what will be $5 EPS paying only 1x P/E. You on the other hand are buying in at 30x P/E, not 15x as it first looked like.
If a one-time, non-core event made a big difference in earnings then adjusted earnings would be more useful in a y/y comparison of operating performance and to forecast future earnings. But here I'd say you can't make a blanket statement and it really depends on what the adjusted earnings is removing.
Dilutes, adjusted. It is good to be aware of how GAAP earnings are doing and what the gap on average is between GAAP and Adj earnings, but adj earnings for the most part give a clear picture of underlying operations. (although sometimes a company will have a write down in one of their intangible assets and hide it in GAAP earnings, but that asset is crucial to the company's operations..so that is something you want to be aware of.
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