In this Diluted Earnings Per Share Calculator, you are prompted to input:
- Net Income ($): You are required to input the company’s net income for a specific period. This figure represents the total earnings after deducting all expenses, taxes, and other relevant costs. You can obtain this figure from the income statement.
- Preferred Dividend ($): You need to enter the total amount of dividends paid to preferred stockholders. This amount is subtracted from the net income to ensure only the earnings available to common stockholders are considered. You can find this number in the company’s financial statements or dividend distribution records.
- Weighted Average Shares Outstanding: Here, you input the average number of common shares in circulation during a specified timeframe. You can calculate it by adding the number of shares at the beginning and end of the period, then dividing by two, or by applying more sophisticated methods to account for varying share counts.
- Conversion of Dilutive Securities: We should account for the additional common shares that would appear if all convertible securities were converted into common stock. Convertible securities include options, warrants, convertible bonds, and convertible preferred stock. To obtain this figure, assess each type of convertible security and calculate the equivalent number of common shares.
Diluted Earnings Per Share Formula & Example
Diluted Earnings Per Share reflects a company’s financial performance, considering the potential conversion of all convertible securities into common stock. This metric adjusts the figure of earnings available per share (EPS), rendering a more realistic picture of a company’s profitability.
The formula for diluted EPS is:
DilutedEPS = (Net Income – Preferred Dividends) / (Weighted Average Shares + Conversion of Dilutive Securities)
Let’s walk through an example to clarify the calculation of Diluted EPS. Assume Company X has the following financial data for the fiscal year 2022:
- Net Income: $2,000,000
- Preferred Dividends: $200,000
- Weighted Average Shares Outstanding: 800,000
- Convertible Preferred Shares: 100,000
- Convertible Bonds (equivalent to 50,000 common shares)
In this scenario, you can start by identifying the convertible securities. Company X has convertible preferred shares and convertible bonds. Convert the preferred shares and bonds into common shares. This conversion yields an additional 150,000 common shares (100,000 from preferred shares + 50,000 from bonds).
Next, calculate the total number of shares for the dilution effect:
Total Shares = Weighted Average Shares + Conversion of Dilutive Securities = 800,000 + 150,000 = 950,000
Now, proceed to compute the Diluted EPS:
DilutedEPS = (Net Income – Preferred Dividends) / Total Shares = ($2,000,000 – $200,000) / 950,000 = $1.89
This calculation reveals a Diluted Earnings Per Share of $1.89. It demonstrates the reduced earnings per share when accounting for all convertible securities, providing a more conservative measure of Company X’s earnings per share.