Diluted EPS
Diluted EPS is earnings per share calculated as if all convertible securities, options and warrants had been turned into common shares.
Diluted earnings per share shows a more conservative picture of profit per share. Besides the shares that already exist, it counts shares that could be created in the future, for example when employees exercise stock options or when convertible bonds and preferred stock are converted into common stock.
Because the share count in the calculation is larger, diluted EPS is usually equal to or lower than basic EPS. The gap between the two shows how much potential dilution is hanging over existing shareholders.
Example: a company has net income of $100 million and 50 million basic shares, giving basic EPS of $2. If outstanding options and convertibles could add 5 million shares, diluted EPS is roughly $100 million divided by 55 million, or about $1.82, with some adjustments for interest saved on converted bonds.
US accounting rules require companies to report both basic and diluted EPS on the income statement. Analysts and the financial press usually focus on diluted EPS, especially for companies that pay employees heavily in stock. Securities that would raise EPS if converted are excluded from the calculation.