DEFINITION of 'If-Converted Method'

Investors use the if-converted method to calculate the value of convertible securities if they were converted into new shares. In-the-money convertible securities (securities where the stock price is above the exercise price) are generally considered during the if-converted method.

BREAKING DOWN 'If-Converted Method'

Convertibles securities are often bonds or preferred shares that inherently have the option to convert into common stock. This is a feature that the issuer will add to the security at the time of issuance to “sweeten the deal” for investors and give them more flexibility to gain value, depending on the direction of the market and/or issuer itself.

Convertibles are often associated with convertible bonds. These allow bond holders to convert their creditor positions to those of equity holders at an agreed-upon price. Other convertible securities can include notes and preferred shares.

The number of shares an investor may receive is calculated on the basis of the convertible security’s conversion ratio. This is the ratio at which investors can convert bonds into stocks; that is, the number of shares an investor gets for each bond. The conversion rate may be fixed or change over time, depending on the terms that the issuer has set for the offering.

For example, a conversion rate of 25 means that for every $1,000 of par value the convertible bondholder converts, she receives 25 shares of stock. Investors can determine the price at which it becomes profitable to convert bonds into equity shares by dividing the selling price of the bond by the conversation rate to determine the breakeven price.

Recent Example of the If-Converted Method

Stericycle released unaudited condensed consolidated statements of income for the three months ended March 31, 2018. Under the if-converted method diluted shares outstanding were 90.7, down 0.1% from 90.8 in the same quarter in 2017.

Stericycle calculated its EPS by using the if-converted method of share dilution. The company described how this method provided insight to how its diluted share count would be affected after preferred shares converted to common shares. Specifically, the impact under the "if-converted" method to Stericylce’s adjusted diluted EPS was $0.06 and $0.07 for the first quarter 2018 and 2017, respectively.

It’s important for companies to list if-converted accounting considerations in its financial statements as a conversion into shares increases the total number of shares outstanding. This can reduce a company’s earnings per share or EPS.

RELATED TERMS
  1. Busted Convertible Security

    A busted convertible security is a convertible bond where the ...
  2. Convertible Bond

    A convertible bond is a bond that can be converted into a predetermined ...
  3. Conversion Ratio

    The conversion ratio is the number of common shares received ...
  4. Conversion

    A conversion is the exchange of a convertible type of asset into ...
  5. Dividend Enhanced Convertible Stock ...

    Dividend Enhanced Convertible Stock is a preferred stock that ...
  6. Convertible Subordinate Note

    A convertible subordinate note is a short-term debt security ...
Related Articles
  1. Investing

    An Introduction to Convertible Bonds

    Getting caught up in all the details and intricacies of convertible bonds can make them appear more complex than they really are.
  2. Investing

    Convertible bonds: pros and cons for companies and investors

    Understand what effect convertible bonds have on investors and companies. Find out the advantages, disadvantages, and what the issue means from a corporate standpoint before buying in.
  3. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  4. Investing

    Can a Bond ETF Work in a Rising Rate Environment?

    The CWB Convertible Securities ETF could be the perfect solution for a rising rate environment.
  5. Managing Wealth

    The Mandatory Convertible: A "Must Have" For Your Portfolio?

    Mandatory convertibles are a little understood security with some distinct advantages. Find out if they are right for you.
  6. Financial Advisor

    Why a Roth Conversion May Make Sense Now

    Converting to a Roth IRA is a simple strategy that can help weave a silver lining from an otherwise financially mediocre year.
  7. Retirement

    Should You Convert Your IRA?

    Discover the factors you must weigh to make this decision.
  8. Financial Advisor

    5 Inflation-Beating Bond Picks

    Look beyond traditional bonds when planning long-term. The alternatives can be extremely rewarding.
RELATED FAQS
  1. Where Does Stock From Convertible Bonds Come From?

    Convertible bonds are considered a combination of debt and equity. Find out how a debt instrument converts into shares of ... Read Answer >>
  2. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ... Read Answer >>
  3. Do convertible bonds have voting rights?

    Convertible bonds usually have no voting rights until they are converted. Even after conversion, they may not be granted ... Read Answer >>
  4. What is stock dilution?

    Stock dilution occurs when company actions reduce the ownership percentage of current shareholders. Find out how ownership ... Read Answer >>
  5. Can Private Corporations Issue Convertible Bonds?

    Find out why a "private corporation" isn't suited to issue convertible bonds. Determine what prevents this move into a company's ... Read Answer >>
  6. Why is a company's diluted EPS always lower than its simple EPS?

    Learn about diluted and basic earnings per share and why a company's diluted earnings per share is usually lower than its ... Read Answer >>
Trading Center