When you’re looking at a company’s profitability, one number that often pops up is Earnings Per Share (EPS). But did you know there’s a more conservative version called Diluted EPS?
Let’s break it down so it’s super easy to understand — no finance degree needed! 🎓
Table of Contents
⚙️ Diluted EPS Calculator
Enter the Net Income, Dividend Payments to preferred shareholders, potential diluted shares and the average number of regular shares held by investors. The tool will calculate Diluted Earnings Per Share.
🙋 What is Diluted EPS?
Diluted EPS shows how much profit a company earns per share, if all potential shares were converted into actual shares.
These potential shares can come from:
- Stock options
- Convertible bonds
- Convertible preferred shares
- Warrants
Why does this matter? Because if more shares are added, each one gets a smaller slice of the earnings pie. 🍰
🧮 Diluted EPS Formula
Here’s the standard formula:
Diluted EPS = (Net Income – Preferred Dividends) ÷ (Weighted Avg Shares + Potential Diluted Shares)✅ Example
Let’s say a company has:
- Net income = $1,000,000
- Preferred dividends = $100,000
- Weighted average shares = 500,000
- Potential shares from stock options = 50,000
Step 1: Subtract preferred dividends from net income
$1,000,000 – $100,000 = $900,000Step 2: Add potential shares to the average shares
500,000 + 50,000 = 550,000Step 3: Divide to get diluted EPS
Diluted EPS = $900,000 ÷ 550,000 = $1.64So, diluted EPS = $1.64 per share.
Compare that to the basic EPS, which would’ve been:
Basic EPS = $900,000 ÷ 500,000 = $1.80See the difference? 📉 The diluted version is lower — and that’s the point!
📌 Why Use Diluted EPS?
Diluted EPS gives investors a realistic worst-case scenario. If all possible shares were turned into real shares, what would the earnings look like per share?
It’s a conservative and more transparent view of a company’s profitability.
🔍 Basic EPS vs Diluted EPS
| Metric | What It Shows |
|---|---|
| Basic EPS | Profit per actual share |
| Diluted EPS | Profit per share if all convertibles are issued |
Investors often use both when analyzing a company’s performance!
📝 Quick Recap
Diluted EPS = (Net Income – Preferred Dividends) ÷ (Avg Shares + Potential Shares)Use this when you want to understand how additional shares could dilute your slice of earnings pie.