A company’s Diluted Earnings Per Share (Diluted EPS) calculation is the ratio between its net profit and the total number of outstanding shares plus the impact of dilutive securities, such as stock options and warrants. A company can also calculate its Basic Earnings Per Share (EPS), which does not account for dilutive securities. 

Diluted EPS calculations are a more conservative estimate of the EPS available to common shareholders. 

The company’s Dilutive EPS calculation is the following:

EPS = (Net Income – Preferred Dividends) / (Weighted Average Number of Shares Outstanding + Conversion of In-the-Money Options + Warrants + Other Dilutive Securities)

The company removes the preferred dividend payments to preferred shareholders because those amounts are unavailable for common stockholders. 

Example Diluted EPS Calculation

Company ABC is a Delaware corporation formed on January 1, 2023. Its corporate charter authorizes the company to issue 10,000 shares of common stock and no preferred stock. After formation, the corporation issued 2,500 shares of common stock. The corporation wants to calculate its diluted EPS for the 2023 fiscal year. 

The corporation’s income statement shows a net income after taxes of $100,000. The company’s current share price is $5 per share. The company has two outstanding in-the-money options for 200 total shares (2 options times 100 shares of stock). The strike price for the options is $3 per share.  

The company calculates its basic earnings per share as follows:

EPS = ($100,000 – 0) / 2,500
EPS = $40.00

The corporation’s basic EPS is $40.00 per share outstanding. 

The company calculates its diluted EPS as follows:

The company first calculates the net dilutive impact of in-the-money options using the treasury method:

  • $600 proceeds from employees exercising the options = 200 shares times the $3 strike price
  • 120 shares acquired using the proceeds = $600 proceeds / $5 current market price
  • 80 shares net impact = 200 shares exercised minus 120 shares acquired on the open market

Diluted EPS = ($100,000 – 0) / (2,500 + 80)
Diluted EPS = $38.76

The corporation’s diluted EPS is $38.76 per share.