Usually you can find both earnings per share and diluted earnings per share listed on a company's income statement.
How to calculate diluted EPSYou calculate basic EPS by taking the company's net income (minus any preferred dividends) and dividing by the number of outstanding shares.
Then, to calculate diluted EPS, simply add the number of "diluted shares" -- the number of shares that would exist if all of a company's existing potential share obligations were issued.The formula for diluted earnings per share is a company's net income (excluding preferred dividends) divided by its total share count -- including both outstanding and diluted shares.
The most common types of diluted shares are employee stock options and investor stock warrants, both of which confer the right to purchase shares of stock at a later date for a specific price. Other types of diluted shares are convertible securities, like convertible bonds or convertible debt, which transition into shares of stock under certain conditions.
Example of diluted EPS calculationHere's how to calculate diluted EPS. Let's say Company X has the following statistics:
|Net income||$110 million|
|Preferred dividends||$10 million|
|Outstanding shares||$200 million|
|Obligation||Potential Share Issuance at Current Price|
|Employee stock options||50 million shares|
|Convertible bonds||150 million shares|
The finer points of calculating diluted EPSTo truly determine the full effect of stock options on diluted shares, follow these additional steps. Stock options are the most common obligation to issue shares that companies face. Basically, when a company issues stock options at a certain exercise (strike) price, you need to account for the intrinsic value of the options and how much stock could be purchased with that amount of money.First, multiply the number of issued stock options by the exercise price. This tells you how much would be paid to exercise the options.
Amount paid = Options issued * Exercise price per share
Value of options in current shares = Amount paid to exercise options / Current share price
Diluted shares = Options issued-Value of options in current shares
This is the number you add to the outstanding share count to determine the number of shares that could exist if the options were exercised.