Anti dilutive
Valuation & CompsA potential share that would raise earnings per share if it were included, and is therefore left out of the diluted calculation.
Also written: anti-dilutive, antidilutive, anti dilutive security
Diluted earnings per share exists to show an existing shareholder the worse case, so a standard rule stops instruments being counted where they would improve the figure. IAS 33 includes potential ordinary shares only when they are dilutive, and anything whose inclusion would raise earnings per share is anti dilutive and excluded.
For options the test collapses into the familiar one. An option struck above the share price brings in more proceeds per share than a share is worth, so the assumed repurchase more than covers the issue and it adds nothing. That is why people describe the rule as a moneyness test, and for options they are not wrong.
For a convertible the test has almost nothing to do with moneyness. Compare the after tax interest the company would save on conversion, divided by the shares conversion would issue, against basic earnings per share. If that incremental figure is higher than basic, conversion lifts the average and the instrument comes out however far in the money it is. A high coupon convertible with a low conversion premium is the standard case, and a candidate answering on the share price alone gets it backwards.
Where several instruments exist they are ranked from most dilutive to least and brought in one at a time, because an instrument that is dilutive on its own can turn anti dilutive once a more dilutive one has already pulled the running figure down. A diluted count therefore cannot be assembled by testing instruments independently and adding them together.
Worked example
Illustrative. Basic earnings per share is 0.40, from net income of 40 on 100 million shares. A convertible with a face of 120 at a 7% coupon converts into 12 million shares, and the tax rate is 25%.
After tax interest saved is 6.3, and 6.3 over 12 million is 0.525. That is above 0.40, so including the notes would lift diluted earnings per share to 46.3 over 112 million, or 0.41.
The notes are excluded and reported diluted earnings per share stays at 0.40. The shares trade at 12.00 against a conversion price of 10.00, so the instrument was in the money the whole time. The coupon decided the answer, not the price.