Diluted Earnings per Share
Definition of Diluted EPS
Diluted earnings per share (diluted EPS) is essentially the earnings made on every share of a public company that is calculated assuming that all the securities that are convertible were duly exercised. Instead of taking only the existing common stock into consideration, Diluted Earnings Per Share assumes that all the securities including convertible bonds, convertible preferred shares, stock options, warrants as well as other things, which can be altered into common stock is altered actually.
Diluted EPS is important for shareholders simply because it lays down the earnings that a shareholder would get in the worst of the scenarios. If a public listed entity has more of different stock types in its capital framework, it should provide information pertaining to both diluted EPS and Basic EPS. This presentation of information should be for both net income and existing operations and is provided on the income statement of the company.
Diluted Earnings per Share Formula
In order to calculate diluted EPS, one must include the impact of all the common shares that are dilutive. Thus, it is basically the company’s net income that needs to be divided by the total sum of a company’s average shares as well as other instruments that are convertible. While, the net income of a company can be acquired through the income statement prepared by it, the average share of a company is basically the weighted common shares average for the entire year. Thus, the weights of each and every factor typically include the duration for which each common share would have remained outstanding.
For example, if an entity has hundred common shares that are outstanding for a period of nine months and hundred and twenty common shares, which are outstanding for three months. The respective weights of nine months as well as three months would stand at .75 and .25. This further represents three-fourth of a year and one-fourth of a year. Therefore, the formula would be .75 (100) plus .25 (120) that would be equal to a weighted average of hundred and five common shares for the complete year.
A company may have to make 2 adjustments to the numerator of this entire calculation and they include, elimination of any interest based expense that is related to dilutive common stock and adjusting of after-tax effect of dividends or any other type of dilutive common shares.