Diluted EPS (Earnings Per Share)

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Diluted EPS?

Diluted Earning Per Share (Diluted EPS) is a financial ratio to check the quality of the Earnings per Share after considering 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.

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Diluted EPS (Earnings Per Share) (wallstreetmojo.com)

It helps in calculating and measuring the company’s profitability based on each share because it considers the possible dilution of the existing shares. Thus, it accounts for the result or the impact of the dilution on the capital structure of the company.

Key Takeaways

  •  Diluted EPS is a financial ratio assessing Earnings Per Share quality in complex capital structures with convertible securities like preference shares, stock options, warrants, and debentures.
  • It determines the firm’s profitability by accounting for the existing shares’ dilution, affecting the capital structure, and computing profitability based on each claim.
  • Using this strategy, investors can evaluate businesses’ performance by comparing like-minded companies across industries. It makes it easier to make informed and crucial decisions. Depending on their income potential assessment, potential for future growth, and share pricing, investors can decide about investment in a company.

Diluted EPS Explained

Diluted EPS is a financial metric that helps in calculation of the earnings that are available to each of the common stocks of an organization after taking into account all the potentially dilutive securities like convertible bonds, stock options, stock warrants that have been converted into common shares. Thus, it evaluates the profit level of the company.

In the diluted EPS calculation process, the items that are deducted are preferred stock dividend because the holders of preference shares have a priority over the common shareholders while dividend is distributed. The weighted average of the number of shares that are diluted, takes into consideration the potential dilution of the stock options and other convertible securities.

For the above purpose, we need to consider the impact of the dilution process. As we study the topic further, it will be clear that the value of diluted EPS is lower than the basic EPS, because the basic EPS only accounts for the outstanding common shares. The objective of including the potentially dilutive securities in the calculation is to find the effect of conversion of securities in future in the earninf per share of the company.

Adjusted diluted EPS is a very commonly used metric for calculation of earnings of the organization and also its performance on a per-share basis. It gives an insight into the effect of the process not only on the company operations but also on the shareholders.

Financial Modeling & Valuation Course (25+ Hours of Video Tutorials)

If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Diluted EPS Explanation in Video



Given below is the formula used for the calculation. Let us understand the same in details.

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)

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
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.

How To Calculate?

Next, we see the different steps that help in the calculation. The steps are as follows:

To find adjusted diluted EPS, start from basic EPS and remove the adverse effect of all dilutive securitiesDilutive SecuritiesDilutive securities are the total number of securities (like stock options, convertible bonds) which the company has at a particular point of time that can be converted into the normal securities by the holders of such security by exercising the right available with them concerning conversion.read more outstanding during the period.

Effect of Dilutive Securities on EPS

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
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 warrantsStock WarrantsA Stock Warrant gives the holder the right to buy the company's stock at a predetermined price in a specific time period, and when the holder exercises the right, the holder buys the company's stock and the company receives the money as its source of capital.read more, 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 antidilutive. 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 normalized diluted EPS.


Let’s take an example for Diluted EPS Calculation.

Example #1

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.

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.

Example #2

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

Colgate Case Study - Earnings Per Share

source – Colgate 10K filings

How Useful Is Diluted EPS To The Investors?

The diluted EPS equation is a very useful metric for every investor because it gives additional knowledge about the potential earnings of the company and how the investors are impacted because of it.

Diluted EPS Vs Basic EPS

The concepts given above are two different methods of calculating the earning per share of the business. Let us try to find the differences between them.

  • The diluted EPS equation takes into account all the potentially dilutive securities of the business, but the latter takes onto account only the outstanding common shares of the company.
  • The former is calculated by dividing the net income after deducting the preferred stock dividend by the weighted average of diluted shares and the latter is calculated by dividing the numerator of the former by the weighted average of common shares.
  • The former is a more conservative measure of the profitability of the company than the latter. The latter is a more straightforward measure.
  • The former takes into account the potential dilution of securities and its impact on shareholders, but the latter does not do so.
  • The value of diluted EPS is lower than the basic EPS.

Thus, the above are some important differences of the two processes.

Frequently Asked Questions (FAQs)

When should both basic and diluted EPS be disclosed?

For each class of equity shares with a separate right to partake in the net profit for the period, an organization shall show basic and diluted earnings per share on the face of the statement of profit and loss.

Is diluted EPS a GAAP measure?

Free cash flow, diluted EPS excluding certain factors, and total segment operating income aren’t performance indicators that conform to generally accepted accounting principles (GAAP) or that are computed per those guidelines.

Is diluted EPS better?

Undiluted EPS is not as precise as diluted EPS. Since diluted EPS considers the effects of all potential stock diluters, it is more advantageous for fundamental research. It ensures that the EPS of the organization is consistent with projected growth. Therefore, it is more critical for the P/E calculation.

What does a higher Diluted EPS indicate? 

A higher Diluted EPS generally suggests that the company is generating strong earnings and that the potential dilution from convertible securities is not significantly impacting the revenues available to common shareholders. It can be seen as a positive sign for investors.

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 –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *