Lesson 7 of 9 · All lessons in this module
- Revenue recognition: core principle and the five-step model
- Revenue recognition in practice and what it means for analysisVideo lesson
- Expense recognition and capitalising versus expensing
- Capitalised interest and capitalised development costsVideo lesson
- Non-recurring items, discontinued operations and accounting changesVideo lesson
- Basic EPS and the weighted average number of sharesVideo lesson
- Diluted EPS: if-converted, treasury stock and antidilutionVideo lesson
- Common-size income statements and margin analysis
- Integrated cases: capitalising, restated results and gross versus net revenue
Lesson 7 of 9 · 15 min
Diluted EPS: if-converted, treasury stock and antidilution
Diluted EPS shows what EPS would be if every dilutive security had become ordinary shares, adjusting both earnings and share count, and leaving out any security that would raise EPS.
In short
- If-converted method (convertible preferred and convertible debt): assume conversion at the start of the year (or at issue, if later). Add the new shares; add back preferred dividends or after-tax interest.
- Treasury stock method (options and warrants): assume exercise, use the proceeds to buy back shares at the average market price; add only the net new shares. The numerator does not change.
- IFRS does the same calculation without the name: the shares notionally issued at the average price ('inferred' shares) are ignored and the excess is added.
- Options are dilutive only when the exercise price is below the average market price.
- Antidilutive securities (those that would raise EPS above basic) are excluded. Diluted EPS is always ≤ basic EPS.
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