What is the implication of excessive dilution in terms of EPS?

Excessive dilution refers to the reduction in ownership percentage of current shareholders as a result of issuing more shares, typically through actions like new stock offerings or stock options. When a company dilutes its shares significantly, the earnings per share (EPS) is likely to decrease because the same amount of earnings is now distributed over a larger number of shares.

This means that even if the total earnings of the company remain unchanged, the EPS – which is calculated as total earnings divided by the total number of outstanding shares – will decline. For investors, a decrease in EPS can signal a decrease in the company’s profitability on a per-share basis, which can lead to a reduction in the perception of its financial health and could ultimately impact its stock price negatively.

In this context, excessive dilution leading to reduced EPS highlights the potential negative consequences for shareholders, making this statement the most accurate reflection of the implications of excessive dilution. Understanding this relationship between dilution and EPS is crucial for evaluating the potential risks associated with equity financing decisions made by a company.