Diluted Earnings Per Share (EPS Diluted) represents the net income available to common shareholders divided by the total number of shares outstanding after accounting for all potential dilutive shares. It provides a conservative view of EPS by including the effect of securities that could dilute earnings.
Why is EPS Diluted Important?
EPS Diluted is important because it:
Shows Potential Dilution: Reflects the impact on EPS if all convertible securities were exercised, helping investors understand dilution risk.
Ensures Conservative Valuation: Provides a more cautious profitability measure by considering the maximum possible share count.
Compares Company Performance: Standardizes EPS for companies with different capital structures, allowing fairer comparisons.
How is EPS Diluted Calculated?
Diluted EPS is calculated using the formula:
Diluted EPS = (Net Income − Preferred Dividends) ÷ (Weighted Average Shares Outstanding + Dilutive Potential Shares)
Where Dilutive Potential Shares include stock options, warrants, convertible debt, and other dilutive instruments, estimated using the treasury stock method or if-converted method as applicable.
Additional Considerations
Treasury Stock Method: Used for options and warrants, assuming proceeds from exercise are used to buy back shares at average market price.
If-Converted Method: Used for convertible debt or preferred stock, assuming conversion into common shares.
Anti-Dilutive Securities: Securities that increase EPS upon conversion are excluded from the diluted share count to avoid misleading results.