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Diluted Earnings Per Share (EPS)
September 1, 2025
What is Diluted Earnings Per Share?
Diluted earnings per share calculates the earnings per share when taking into account all options and potential dilutive effects of stock options, warrants and convertible bonds. Basic EPS only takes common stock into account.
If a company’s options were all exercised then the number of shares would rise, and thus diluted EPS is typically lower than basic EPS which excludes these items.
What is Earnings Per Share?
Earnings per share is a measure which shows the company’s net income attributable to one share held of the company. It is a key metric for public companies as it is often used by management to provide guidance of company performance. Investors will analyze the year-over-year growth of EPS to help determine if a company is on track and performing in line with market expectations.
EPS can also be used in valuation comparisons such as price/earnings ratio or dividend cover ratio.
Diluted EPS Template
Download the Financial Edge Diluted EPS Template to calculate adjusted earnings per share, reflecting the impact of potential dilution from stock options, RSUs, and convertible bonds. This will give analysts a more conservative and realistic measure of profitability per share.
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Formula for Diluted EPS
The formula for diluted EPS is adjusted basic earnings divided by the fully diluted weighted average number of shares of the company.
Diluted EPS = Adjusted basic earnings / Fully Diluted WASO
Steps for Using the Diluted EPS Template
- Download the Excel template
- Replace the example numbers in the blue font cells with the company’s data
- Net income
- Shares outstanding at the beginning of the period
- Shares repurchased during the period
- Share price average for the period
- Employee stock options (and strike price)
- Any convertible debt (and interest rate)
- Tax rate
- Add or remove line items as necessary (right click → Insert or Delete)
- Make sure the formulas in the black font cells capture all updated line items
- Review the final calculation of basic and diluted EPS
This template will capture any share repurchases during the period, employee stock options that may or may not be exercised, as well as options and convertible debt.
Some companies may not have some of these items so the cells can be left blank accordingly.
Information regarding options and convertible debt can usually be found in the company financial statements.
Conclusion
Investors use diluted earnings per share as it takes into account all options and potential dilutive effects of stock options, warrants and convertible bonds. Being able to calculate this effectively will stand all analysts in good stead for their future career. It may require gleaning information from the notes in the financial statement to fully account for all potential dilutive impacts on the earnings.
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