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.
Good Inc. has the following information in the year-end 2017 –
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- 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 = |
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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)
Diluted EPS Formula Video
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This has been a guide to Diluted EPS Formula. Here we discuss how to calculate diluted earnings per share along with practical examples and downloadable excel templates. You may also have a look at these articles below to learn more about Financial Analysis –
