Diluted EPS (Earnings Per Share)

What is Diluted EPS?

Diluted Earning Per Share (Diluted EPS) is a financial ratio to check the quality of the Earnings per Share after taking into account potentially dilutive securities that may increase the number of outstanding shares in the future. Calculating diluted EPS is useful when the company has a complex capital structure and contains convertible securities like Preference Shares, Stock Option, Warrants, Convertible Debentures etc

Diluted EPS Formula

Diluted EPS Formula = (Net Income – Preferred Stock Dividends) / (Weighted Average Number of Shares Outstanding + the Conversion of Any in The Money Options, Warrants and Other Dilutive Securities)

DILUTED EPS FORMULA

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For eg:
Source: Diluted EPS (Earnings Per Share) (wallstreetmojo.com)

From the above-diluted earnings per share formula, you can understand you need to look at the entire balance sheet and the income statement Diluted EPS Calculation.

Steps to Calculate Diluted EPS

To find diluted EPS, start from basic EPS and then remove the adverse effect of all dilutive securities outstanding during the period.

Effect of Dilutive Securities on EPS

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For eg:
Source: Diluted EPS (Earnings Per Share) (wallstreetmojo.com)

The Diluted EPS Formula is as per below =

Diluted EPS formula

The adverse effects of dilutive securities are removed by adjusting the numerator and the denominator of the basic EPS formula.

  1. Identify all potentially dilutive securities: convertible bond, options, convertible preferred stock, stock warrants, etc.
  2. Calculate the basic EPS. The effect of potentially dilutive securities is not included in the calculation.
  3. Determine the effect of each potentially dilutive security on EPS to see whether it is dilutive or anti-dilutive. How? Calculate the adjusted EPS assuming the conversion occurs. If adjusted EPS (>) basic EPS, the security is dilutive (anti-dilutive).
  4. Exclude all anti-dilutive securitiesAnti-dilutive SecuritiesAnti dilutive securities refer to the financial instruments initially available as convertible securities and not ordinary shares. However, converting such shares into ordinary stocks results in the higher earnings per share or an increase in shareholders' voting power.read more from the calculation of diluted earnings per share.
  5. Use basic and dilutive securities to calculate diluted EPS.

Diluted EPS Example

Let’s take an example for Diluted EPS Calculation.

Good Inc. has the following information in the year-end 2017 –

  • Net Income: $450,000
  • Common Shares Outstanding: 50,000
  • Preferred Stock Dividend: $50,000
  • Unexercised Employee Stock Options: 5000
  • Convertible Preferred Stocks: 23,000
  • Convertible Debt: 10,000
  • Warrants: 2000

Calculate the Diluted Earnings Per Share.

All information is given in the example above. We will put it in the diluted earnings per share formula.

  • First, we will find out the earnings per share.
  • Basic Earnings per share = Net Income / Common Shares Outstanding = $450,000 / 50,000 = $9 per share.

Diluted Earnings per Share Formula = (Net Income – Preferred Stock Dividends) / (Common Shares Outstanding + Unexercised Employee Stock Options + Convertible Preferred Stocks + Convertible Debt + Warrants)

  • Or, Diluted EPS Formula = ($450,000 – $50,000) / (50,000 + 5000 + 23,000 + 10,000 + 2000)
  • Or, DPS = $400,000 / 90,000 = $4.44 per share.

Colgate Diluted EPS Analysis

We note the following in Colgate’s Earnings Per Share schedule

Colgate Case Study - Earnings Per Share

source – Colgate 10K filings

  • Basic EPS Calculation Methodology – Basic earnings per common share is calculated by dividing net income available for common stockholders by the weighted-average number of shares of common stock outstanding for the period.
  • Diluted Earnings Per Share Calculation Methodology – Diluted earnings per common share is calculated using the treasury stock method on the basis of the weighted-average number of shares of common stock plus the dilutive effect of potential common shares outstanding during the period.
  • Dilutive potential common shares include outstanding stock options and restricted stock units.
  • Anti-dilutive securities – As of December 31, 2013, 2012, and 2011, the average number of stock options that were anti-dilutive and not included in diluted earnings per share calculations were 1,785,032, 3,504,608, and 3,063,536, respectively.
  • Stock Split Adjustment – As a result of the 2013 Stock Split, all historical per share data and numbers of shares outstanding were retroactively adjusted.

How useful is diluted EPS to the investors?

Diluted EPS (Earnings Per Share) Video

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This has been a guide to Diluted Earnings Per share and its meaning. Here we discuss how to calculate diluted EPS along with examples. You may also have a look at the following articles to learn more about advanced shares –

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