How to Calculate Diluted EPS

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Diluted EPS is a measure of a company's performance.
Diluted EPS is a measure of a company's performance. (Image: business image by peter Hires Images from Fotolia.com)

EPS stands for earnings per share, which is a financial metric used by investors to assess the value of the company. The diluted earnings per share includes convertible securities in calculating how many dollars a company has in profits per share. Diluted EPS is used instead of EPS because when convertible securities are turned into shares, the value of the stock decreases because the company is being split among more shareholders.

Consult the company's annual report to find out the company's net income, dividends paid to preferred shareholders, total number of shares issued and total number of convertible securities outstanding. Convertible securities are securities that can be redeemed for company stock, such as employee stock options.

Subtract the dividends paid to preferred shareholders from the company's net income. For example, if the company made $110 million but paid $11 million to preferred shareholders, you would subtract $11 million from $110 million to get $99 million.

Add the average number of shares outstanding to the number of convertible securities. For example, if the company had 29 million shares outstanding and 4 million shares worth of convertible securities, you would add 29 million to 4 million to get 33 million.

Divide the result from Step 2 by the result from Step 3 to calculate the diluted earnings per share. In this example, divide $99 million by 33 million to find that the company had $3 of diluted earnings per share.

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