What is the difference between Basic vs Diluted EPS? How is it calculated?

Basic EPS takes net income, subtracts preferred dividends, and then divides by the weighted average number of shares of common stock outstanding during the period in question. Diluted EPS doesn't use the number of shares outstanding, instead using the number of possible shares outstanding, given potential dilution from convertible securities and employee stock options.  The so-called Treasury Stock Method is used to calculate diluted EPS.

Example of Treasury Stock Method calculation: Assume 100,000 shares outstanding, $500,000 of Net Income and 10,000 employee stock options are outstanding with a strike price of $50 per share.  The average market price of the shares, during the past year is $100.

Basic EPS is 500,000/100,000 = $5 per share.  Diluted EPS is 500,000/105,000 = $4.76 per share.  Note the denominator is increased by 5, 000 shares in the calculation of diluted EPS. The company will take the exercise price proceeds of $500,000 (50x 10,000) to go into the market and buy 5,000 shares

(500,000/100), requiring the company to issue an additional 5,000 shares.