What are Weighted Average Shares Outstanding (Diluted)?
Weighted Average Shares Outstanding (Diluted) represents the time-weighted average number of common shares outstanding plus the effect of all dilutive potential shares—such as stock options, warrants, and convertible securities—over the reporting period.
Why are Diluted Weighted Average Shares Important?
Diluted weighted shares are crucial because:
Conservative EPS Measurement: They provide a conservative basis for calculating Diluted Earnings Per Share (Diluted EPS), showing the lowest possible EPS.
Dilution Impact Assessment: Helps investors understand how potential share conversions affect ownership percentage and earnings per share.
Comparability: Ensures consistency in per-share calculations across companies with different capital structures.
How are Diluted Weighted Average Shares Calculated?
To calculate diluted weighted average shares:
Determine basic weighted average shares outstanding, as per the standard method.
Identify all dilutive instruments (options, warrants, convertibles).
Apply the treasury stock method for options and warrants and the if-converted method for convertible securities to calculate potential shares.
Add the dilutive potential shares to the basic weighted average shares.
Diluted Weighted Average Shares = Basic Weighted Average Shares + Dilutive Potential Shares
For example, if basic weighted shares are 1,100,000 and dilutive potential shares total 50,000, the diluted weighted shares are 1,150,000.
Additional Considerations
Anti-Dilutive Exclusion: Instruments that increase EPS upon conversion are excluded from the diluted share count.
Method Selection: Use the treasury stock and if-converted methods as per accounting standards (e.g., IFRS, US GAAP).
Disclosure Requirements: Companies must clearly disclose the calculation of diluted shares and the instruments included.