A company’s share count is its number of outstanding shares of common stock. If a company has dilutive securities, its share count could potentially increase. A dilutive security is a type of investment that gives its owner the right to convert it into common stock. Under generally accepted accounting principles, or GAAP, a diluted share count includes a company’s total outstanding shares as if all dilutive securities were converted to common shares. The basic share count excludes the effect of dilutive securities. A company uses these share counts to calculate its earnings per share on its income statement.
1. Determine from a company’s annual report of Form 10-K the number of shares of common stock it had outstanding throughout the year. You can obtain a public company’s annual report from the U.S. Securities and Exchange Commission’s website EDGAR Online. For example, assume a company had 100,000 shares outstanding throughout the year, which means its basic share count is 100,000.
2. Identify in the annual report the number of stock options the company had outstanding during the year, the exercise price per option and the company’s average stock price throughout the year. Also determine the number of convertible bonds, the number of shares of convertible preferred stock and the number of shares of common stock into which each convertible preferred share can be converted. In this example, assume there are 5,000 stock options with a $3 exercise price and a $5 average stock price. Assume there are 10,000 shares of convertible preferred stock, which can each be converted into two common shares, and 10,000 convertible bonds.
3. Multiply the number of stock options by the exercise price. Divide your result by the average stock price. In this example, multiply 5,000 by $3 to get $15,000. Divide $15,000 by $5 to get 3,000.
4. Subtract your Step 3 result from the number of options to determine the additional shares from stock options. In this example, subtract 3,000 from 5,000 to get 2,000.
5. Multiply the number of shares of convertible preferred stock by the number of common shares into which each convertible preferred share could be converted to calculate the additional shares from convertible preferred stock. In this example, multiply 10,000 by 2 to get 20,000.
6. Add together the basic share count, the number of convertible bonds outstanding, the number of additional shares from stock options and the number of additional shares from convertible preferred stock to calculate the diluted share count. Continuing with the example, add 100,000, 10,000 convertible bonds, 2,000 shares from options and 20,000 shares from convertible preferred stock to get a diluted share count of 132,000.
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