What is Diluted EPS?
Diluted earnings per share (Diluted EPS) is a financial metric that shows a company’s earnings allocated to each common share assuming every convertible security, stock option, warrant, and convertible bond is exercised and converted into ordinary shares. It always equals or is lower than basic EPS and gives investors a more conservative view of profitability.
How It Works
- Start with net income attributable to common shareholders.
- Add back interest, after tax, on convertible debt and any preferred dividends that would not be paid if conversion occurred.
- Divide by the weighted-average number of shares outstanding plus all potential dilutive shares (options, warrants, convertibles).
- If the result is higher than basic EPS, the security is anti-dilutive and excluded under IAS 33.
Saudi Context
Saudi listed companies on Tadawul disclose both basic and diluted EPS in their IFRS financial statements. The Saudi Organization for Chartered and Professional Accountants (SOCPA) requires the calculation to follow IAS 33, and the Capital Market Authority (CMA) reviews EPS disclosures in prospectuses for IPOs and rights issues.
Example
A Riyadh-based company reports net income of SAR 50 million and has 10 million weighted-average shares outstanding (basic EPS = SAR 5.00). It also has 1 million stock options with an exercise price below market. Diluted EPS becomes SAR 50M / 11M = SAR 4.55, signalling potential dilution to existing shareholders.