Basic outstanding shares and fully diluted shares to determine the number of shares issued by the company using different methodologies. Outstanding shares are shares of companies that have obtained a license, issued by and representing the ownership of the company from investors and institutions who own these shares. Fully diluted shares include all of those shares plus the additional shares if all convertible securities of the company were made.
Fully Diluted shares?
Fully diluted shares total number of shares that would be outstanding if all possible sources of conversion, such as convertible bonds and stock options is not in place. This number of shares is important for the profits of the Company per share (computation of EPS), because using a fully diluted share increases the number of shares outstanding used in the calculation, reducing the dollars earned per common share.
What is the earnings per share (EPS)?
EPS is a calculation of the amount of public dollars earnings a company generates per ordinary share. According to analysts, this figure should be one of the key indicators of a company’s value, but also an important indicator for shareholders.
As The Earnings Per Share Is Calculated
EPS is defined as (net income – preferred dividends) / (weighted average common shares outstanding). All proceeds are paid to the holders of preferred shares as cash dividends are subtracted from net profit, because the ratio only applies to ordinary shares. Weighted average ordinary shares (beginning of period + end of period) / 2. If the business can generate more profit per ordinary share, the company is considered to be more valuable and the stock price may increase.
Suppose, for example, that ABC Corporation produces $ 10 million of net income and pay all preferred shareholders a total of $2 million in dividends, so net income available to all ordinary shares is $ 8 million. If the weighted average of ordinary shares of the company outstanding is 1 million, the earnings per share is $8 per share. $8 of EPS is “earnings per share”, because the General is not fit for cultivation.
Factoring in the fully Diluted shares
Some types of securities can be converted into ordinary shares, including convertible bonds, convertible preferred stocks, stock options, rights and warrants. Full dilution assumes that every security which may be converted into ordinary shares are converted, reducing earnings per ordinary share.
For example, assume that ABC issues 100 000 shares in stock options for company executives to reward them for achieving the profit goal. The company also has convertible bonds that allows bondholders to convert a total of 200 000 ordinary shares and ABC has convertible preference shares, and these shares can be converted into 200,000 shares of common stock.
Full dilution assumes that these 500,000 additional ordinary shares the shares are issued, which increases the cost of the shares up to 1.5 million people. With $8 million profit in the previous example, fully diluted earnings per share equals ($8 million / 1.5 million shares) or $5.33 per share, which is lower than basic earnings per share of $8 per share.