A complex capital structure is when a company capital structure comprises convertible financial securities, which have a dilutive effect. Examples of convertible financial securities are convertible preferred shares, warrants, convertible bonds, and stock options.
Because it has the potential for dilution, the company must report basic and diluted earnings per share (EPS). Dilution occurs when the conversion of those instruments into ordinary shares will result in a reduction in EPS. The company needs to disclose diluted EPS because this information is essential for existing general shareholders.
The opposite effect of dilution is anti-dilution. It happens when the conversion of the instrument does not reduce EPS below the basic EPS. Antidilutive financial instruments are not considered in the diluted EPS calculation.
