Anti-dilutive securities

Anti dilutive securities are those that raise the profit per share (EPS) of a company when they are counted as common titles. This, despite the fact that the number of participations is increasing.

This happens with financial instruments that, when converted into ordinary shares , raise the profits to be distributed among investors. To explain it graphically, the number of pieces into which the cake must be divided is greater. However, at the same time, the cake is bigger.

At this point, it should be explained that there are convertible securities, which are bonds or preferred shares that can be converted into ordinary shares. In this way, they become tradable in the financial market.

Example of anti dilutive titles

Suppose a firm makes a net profit of $ 10,000 and has an average of 200 outstanding common shares. Likewise, it has 100 preferred shares (convertibles), which pay a dividend of $ 40 each.

Earning per share would then be calculated as follows: (10,000-100 * 40) /200=6,000/200= $ 30

However, if the outstanding shares were converted into ordinary shares, the EPS, which in this case would be the diluted EPS , would be shown below: (10,000 / (200 + 100)) = $ 33.33

Therefore, in the example presented, the preferred shares are anti-dilutive securities.

Uses of the term anti dilutive

There are several uses of the term anti dilutive. For example, it is a characteristic of certain operations such as the withdrawal of ordinary shares, the result of which is the distribution of net profits among a smaller number of participations.

Also, some corporate decisions may be anti-dilutive, for example, if one company acquires another through the issuance of ordinary shares. This, as long as the value added by the operation compensates the increase in the number of participations.

Another use of the term anti-dilutive is the one referring to property rights, when the shareholder has the power to acquire more titles of the company. If this were not possible, any issuance of new shares would reduce the investor’s participation percentage.

 

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