Diluted EPS Formula | Calculate Diluted Earnings Per Share

Formula to Calculate Diluted EPS

Diluted EPS is a measurement of profitability and is calculated as the ratio of company’s income to the number of outstanding shares after taking into consideration dilutive securites like convertible debt, preferred stocks, options and warrants.

Let’s have a look at the formula of diluted earnings per share –

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.

Explanation

There is a difference between basic and diluted earnings per share. In basic earnings per share (EPS), the idea is to find out the net income per share of the firm. For example, if a firm has a net income of $100,000 and the firm has 10,000 outstanding shares; then the earnings per share (EPS) would be = ($100,000 / 10,000) = $10 per share.

However, in this case, the idea is about realization. In diluted earnings per share (DPS), along with the common outstanding shares, we will also consider convertible shares – the shares which have the possibility of turning into the company’s shares.

That’s why, in almost all situations, DPS would always be lower than the earnings per share (this is basic math – in the case of DPS, the denominator is much bigger).

Example of Diluted Earnings per Share Formula

Let’s take an example for Diluted EPS Calculation.

You can download this Diluted Earnings per Share Excel Template here – Diluted Earnings per Share Excel Template

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

Popular Course in this category

All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)4.9 (1,067 ratings) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion

View Course

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 basic earnings per share and the DPS

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.

Use of Diluted EPS

If you look at the financial statements, you may not get the information related to the diluted earnings per share. You need to look at notes along with the financial statements to have a sense of diluted earnings per share.

Using a diluted EPS formula helps investors know what would be the earnings per share if all or a few convertible securities convert into the company’s shares.

As an investor, you need to look at both – earnings per share and diluted earnings per share to have a holistic view of earnings per share.

Diluted EPS Calculator

You can use the following Diluted EPS Calculator

Net Income
Preferred Stock Dividends
Common Shares Outstanding
Unexercised Employee Stock options
Convertible Preferred Stocks
Convertible Debt
Warrants
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)

(0−0)
	=	0
(0+0+0+0+0)

Calculate Diluted Earnings per Share in Excel (with excel template)

Let us now do the same example above in Excel.

This is very simple. You need to provide the two inputs of Net income and Common Shares Outstanding.

You can easily do the Diluted EPS Calculation in the template provided.

First, we will find out the earnings per share.

Here is the formula for Diluted EPS Calculation

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