Before moving directly to diluted EPS (Earning Per Share), it is important to understand its basics. The increase or addition of shareholders of the company leads to dilution of rights and share of existing shareholders. This dilution may be a result of issuing new capital, conversion of preferred capital, or conversion of debt into equity capital, ESOPs, etc. EPS is the earnings of the company per outstanding share. And, diluted EPS means the earnings per share after considering the dilution in share capital that has taken place. Diluted EPS Calculator is an online tool to help in calculating this diluted EPS quickly.
The formula for calculating diluted EPS is as follows:
Diluted EPS = (Net Income – Preferred Dividends) / (Shares Outstanding + Unexercised Employee Stock Options + Convertible Preferred Stocks + Convertible Debt + Warrants)
How to Calculate using Calculator?
The user is required to enter the following details into the diluted EPS calculator:
Net income, also known as earnings or profit after tax. It is the net earnings that a company earns after discharging its tax liability. This all leftover earnings belong to the shareholders of the company. It includes the preference dividend, which is a payment of fixed nature in case the company earns a profit.
A preference dividend is the share of preferred shareholders in the earnings of the company as per the terms of issuance of such shares. Distribution of preference dividend is a sort of fixed nature payment for the company if it earns profits. For the purpose of calculating diluted EPS, we need to subtract this preferred dividend from the net earnings. This will provide us with the earnings left exclusively for equity shareholders.
Outstanding Number of Shares
Enter the number of outstanding shares (shares issued to the general public).
Enter the total number of dilutive shares. It means the number by which the shares of the company will get diluted. It includes all the shares that the company issues in conversion of preference share capital or to realize debt holdings, ESOPs, warrants, etc.
Consider the following information of a company, X Ltd.:
Net income: $80,000
Number of shares outstanding: 10,000
Dividend on preferred stock: $15,000
Unexercised employee stock options: 800
Convertible preferred stocks: 4,500
Convertible debt: 2,500
Dilutive shares = Convertible preferred stocks + convertible debt + unexercised employee stock options + warrants = 4,500 + 2,500 + 800 + 200 = 8,000
Diluted Earnings per Share Formula = ($80,000 – $15,000) / (10,000 + 8,000) = 65,000 /18,000 = $3.61 per share
Assume that the company does not have any convertibles or unexercised employee stock options and warrants but have preference capital which is not to be converted into equity. The EPS in this case will be:
EPS = (80,000-15,000)/10,000 = $6.5 per share
This simply suggests that, along with the dilution in the rights of shareholders, their earnings also get diluted. This is very critical to understand and appreciate before making any investment decisions. Because this can have a substantial impact on the valuation, yield and expected appreciation at per share level.