Calculating Diluted Earnings per Share

Calculating Diluted Earnings per Share (EPS) Formula

By John Bromels – Updated Jun 2, 2025 at 2:06 PM

Key Points

Basic EPS is calculated by dividing net income minus preferred dividends by outstanding shares.
Diluted EPS includes potential shares from obligations like stock options or convertible bonds.
Using diluted EPS helps investors understand total potential share dilution and true earnings impact.

Earnings per share, or EPS, is a common financial metric used to gauge a company's profitability. It measures the company's net earnings against its current share count. Diluted EPS goes a step further, factoring in shares that a company may be obligated to issue in the future.

Usually you can find both earnings per share and diluted earnings per share listed on a company's income statement.

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An infographic showing and explaining the formula used to calculate diluted earnings per share. — Image source: The Motley Fool

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Metric	Amount
Net income	$110 million
Preferred dividends	$10 million
Outstanding shares	$200 million

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To determine Company X's basic EPS, we first subtract $10 million from $110 million to get $100 million. Then we divide by 200 million shares to get an EPS of $0.50 per share.

However, let's say Company X also has the following obligations:

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Obligation	Potential Share Issuance at Current Price
Employee stock options	50 million shares
Convertible bonds	150 million shares

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Amount paid = Options issued * Exercise price per share

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Next, divide that result by the current market price of the stock to determine how many shares could be purchased for the exercise price of the options.

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Value of options in current shares = Amount paid to exercise options / Current share price

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Finally, subtract this figure from the number of options outstanding to determine the excess shares that would need to be issued to meet these obligations.

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Diluted shares = Options issued-Value of options in current shares

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This is the number you add to the outstanding share count to determine the number of shares that could exist if the options were exercised.

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About the Author

John Bromels has been a contributing Motley Fool stock market analyst since 2012 covering information technology, communication services, industrials, energy, materials, utilities, and healthcare sectors. He finds investing to be more interesting and profitable than collectible trading card games and is an award-winning puzzle designer.

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