💬 [E6930] Graham & Dodd warn that reported earnings can be significantly overstated without proper dilution adjustments, noting that 'more than one-third of reported earnings per share are lost when the necessary adjustment is made.' This analytical framework for identifying overstated earnings in companies with complex capital structures (convertible bonds, warrants, participating interests) provides a fundamental basis for identifying overvalued equities where headline EPS masks true shareholder economics.

💬 [E6929] Graham & Dodd establish that per-share earnings calculations must reflect all potential dilutive effects from convertible securities, warrants, and participating interests. They demonstrate that American Airlines' reported EPS of $3.76 drops 35% to $2.45 after adjusting for convertible debentures at $12.50/share, and Trico Products' average EPS falls 41% from $6.17 to $3.64 after accounting for restricted shares participation. The principle holds that intrinsic value cannot exceed what would be justified if all conversion privileges were exercised in full.