What Is the Diluted Share Price?

Diluted earnings per share (EPS) means that earnings are reported on a hypothetical amount of 澳洲幸运5官方开奖结果体彩网:outstanding shares.

It is calculated by dividing the 澳洲幸运5官方开奖结果体彩网:net income for a firm during a given reporting period by the total amount of 澳洲幸运5官方开奖结果体彩网:shares outstanding plus all shares authorized for issuance.

Understanding Diluted Share Prices

When a corporation releases financial information, there are a few different variations used when reporting total earnings. These variations are total dollar amounts, earnings as a percent of total revenue, earnings per share (EPS), and 澳洲幸运5官方开奖结果体彩网:diluted EPS.

Examples of shares that can be authorized at a future date include those that result from 澳洲幸运5官方开奖结果体彩网:call options and 澳洲幸运5官方开奖结果体彩网:convertible bonds. This type of earnings a🐷nalysis is very helpful when analyzing a firm's financial information and stock price.

The rationale behind such an analysis is to evaluate the effect that issuing all of the 澳洲幸运5官方开奖结果体彩网:authorized stock at once wouldꦡ have on the company's underlying stock price.

Because the number of shares outstanding increases, the value of all per-share figures reported will fall, and analyzing a firm on this basis would provide the investor with a better sense of the "true" value of a firm on a per-share basis.

Diluted Share Price Example

For example, suppose that a company has 5 million shares outstanding with a share price of $35, a 澳洲幸运5官方开奖结果体彩网:market cap of $175 million, and a reported net income of $3 million. The 澳洲幸运5官方开奖结果体彩网:board of directors has 🧸also authorized a new issuance of 1 million shares, plus another 500,000 shares in stock option𓂃s.

The current EPS is $0.60 and is represented in the current stock price of $35. On a fully diluted basis, we would get an EPS figure ofꦉ $0.46 (🦹$3 million/6.5 million shares).

If all parties exercised their options and t♊he firm issued all approved shares, the share price would fall because there would be an iꦇncrease in the number of shares outstanding.

Because thꦡe firm would not have immediately changed in value after the number of shares outstanding increased, the market cap would remain the same at $175 million, but the share price would fall to about $30 per shar🅷e ($175 million/6.5 million shares).

It is useful to analyze a firm on a fully diluted basis because it better represents the firm's financial strength, especially earnings. Although every individual may not exercise every option at the same time, it is useful to see what would happen if they did because this provides investors with a very conservative estimate of company earnings.