Weighted Average EPS and Diluted EPS

Weighted Average EPS and Diluted EPS

In the last article, we discussed on Earnings per Share (EPS) as an effective indicator. For companies without any changes in the number of outstanding shares issued for the financial period/year, “basic EPS” is used in the financial reporting.

However, for companies with changes in the number of outstanding shares issued during the reporting period, the term “weighted average EPS” is commonly used in preparing the financial reports.

In addition, you may encounter a term called “diluted EPS” when reading any financial reports. In this article, let’s further discuss the earnings in relation to “weighted average EPS” and “diluted EPS”.

The number of outstanding shares issued by a company may change due to corporate actions like bonus issue, rights issue, subdivision of shares, consolidation of shares, etc. As such, the weighted average of outstanding shares issued is used to calculate the EPS over the reporting period.

For example, Company ABC has 1 million shares at the beginning of the year. Halfway through the year, due to corporate action, an additional 1 million shares have been issued, increasing the total outstanding shares issued to 2 million shares.

At the end of the year, let’s say Company ABC reported earnings of RM2 million. To ensure the earnings per share calculations are as accurate as possible for the year, weighted average shares issued is used.

To calculate number of weighted average shares, the formula is as below:

(Number of shares in period-1 x [number of months covered ÷ 12 months]) + (Number of shares in period-2 x [number of months covered ÷ 12 months]) + …

The example above is showing number of shares for two different periods during the year. Period-1 covers 6 months and period-2 covers 6 months also; the weighted average shares will be:

= (1,000,000 x [6 ÷ 12]) + (2,000,000 x [6 ÷ 12])

= 500,000 + 1,000,000

= 1,500,000


Number of outstanding shares issued

Period Covered

Weighted Shares

First half of the year




Second half of the year




Weighted average    



Weighted Average EPS =             Profit                                                  

Number of Weighted Average Shares

In the example above, the weighted average EPS for the Company ABC during the year is:

=                 RM2 million  


=            RM1.33

For companies that have a complex capital structure, diluted EPS is considered to be more precise as it takes into account the possibility of the shares of convertibles or warrants exercised. With this measurement in place, it allows investors to determine how the earnings per share attributable to them could be reduced and presents the worst-case scenario.

For example, Company XYZ has 1 million shares and 500,000 warrants have been issued in the market. At the end of the year, XYZ reported earnings of RM1 million.

Simple EPS         =             RM1 million       

1 million

= RM1

In the case of all warrants getting exercised, the share base will then increase to 1.5million, and thus the earnings per share will be diluted.

Diluted EPS        =             RM1 million       

1.5 million

= 66.6 sen

Diluted EPS is a conservative yet crucial approach to calculate EPS, as it indicates the worst-case scenario that would reduce earnings per share. It is important that investors value the business assuming all possible dilution that can take place will take place.

Whether weighted average EPS or diluted EPS, the principle is the same as basic EPS as discussed in the last article. The higher the weighted average EPS or diluted EPS, the better the performance of the company.