The treasury stock method assumes option holders exercise, the company uses those proceeds to buy back shares at market price, and only the net new shares dilute EPS.
How it works
Net income divided by basic shares gives basic EPS. Options outstanding times exercise price gives assumed proceeds, divided by market price to find shares hypothetically repurchased — the difference between options outstanding and shares repurchased is net new (dilutive) shares, added to basic shares before recalculating EPS.
What this does not include
This assumes all options are “in the money” (exercise price below market price) — out-of-the-money options add no dilution under the treasury stock method and would need to be excluded from a real diluted EPS calculation.
How to use this calculator
- Enter net income, basic shares outstanding, options outstanding, exercise price, and average market price.
Frequently asked questions
Why is diluted EPS always lower than (or equal to) basic EPS?
Because dilutive securities add shares to the denominator without adding to net income in the numerator, spreading the same earnings across more shares.
What other securities can dilute EPS besides stock options?
Convertible bonds, convertible preferred stock, and warrants can all potentially convert into common shares, each requiring its own dilution calculation under similar principles.
Why do companies report both basic and diluted EPS?
Basic EPS shows current per-share earnings on existing shares; diluted EPS shows a more conservative, “worst-case” per-share figure accounting for potential future dilution — both give investors a fuller picture.
