Diluted EPS Calculator

Diluted EPS

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.

Formula

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)

Diluted EPS Calculator

Calculator

How to Calculate using Calculator?

The user is required to enter the following details into the diluted EPS calculator:

Net Income

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.

Preferred Dividend

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).

Dilutive Shares

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.

Example

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

Warrants: 200

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.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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