Dilutive securities are financial instruments like stock
options, warrants, convertible bonds, etc. which increases the number
of Common stock, if exercised. It reduces the Basic EPS (Earnings Per
Share). Only if the Diluted EPS is less than the Basic
EPS then it is called Dilutive Securities
Anti-Dilutive
Securities are financial instruments which are used to describe a convertible
security which could increase a company’s EPS, if exercised or converted into
Common Stock. Such conversions are not considered when calculated EPS.
When a company has issued securities that can be exchanged for
common shares, converting the securities into common shares would potentially
dilute the ownership stake of existing shareholders. When calculating earnings
per share, companies must consider the potential dilution.
For securities that pay a dividend or periodic interest payment,
the after-tax payments would be added back to earnings (since those payments
would no longer be necessary if the securities were converted.) Then, the
number of shares into which the securities are converted is added to the shares
outstanding.
Diluted EPS = (Earnings + After tax payments on convertible
securities)/(Shares outstanding plus shares issued on conversion)
In some cases, securities would be antidilutive, or increase
earnings per share if they were assumed to be converted. Such securities are
not included in the diluted EPS calculation, as it is intended to represent the
maximum possible dilution.
