Diluted earnings per share
Financial ratio analysis - performance ratios.
Diluted earnings per share are calculated as:
Profit attributable to ordinary shareholders ÷ Diluted weighted average number of shares in issue during the period.
Profit after tax attributable to ordinary shareholders is often known as 'earnings' or 'net profit'.
Diluted EPS example
Earnings for the period are £40 million and the diluted number of shares is 52 million.
EPS = £40m / 52m
= £0.77 (= 77 pence)
'Diluted' earnings per share are calculated by adjusting the earnings and number of shares for the effects of 'dilution' of the current ordinary shareholders' entitlements.
'Dilution' is defined in IAS 33 as:
The reduction in EPS assuming that the number of shares increases because:
- Convertible instruments are converted,
- Options or warrants are exercised, or
- Ordinary shares are issued on the satisfaction of specified conditions.
Relevant accounting standards include IAS 33 and Section 1 of FRS 102.