EPS stands for earnings per share. Investors use EPS to measure how much money a company makes for every outstanding share the company has. Diluted EPS is slightly different in that it measures the earnings per share for a company if all convertible securities (such as preferred stocks, convertible debt instruments, stock options and warrants) were used to calculate the metric.
Note: If a publicly registered company has more than one type of stock in its capital structure, it must provide information related to both diluted and basic EPS.
Diluted earnings per share provides a picture of the true shareholder base and how a company’s earnings are distributed. Diluted EPS is an important metric to shareholders because it determines the profit shareholders will receive in a scenario that includes all securities from preferred stocks to stock options and warrants.
Diluted EPS is calculated in a way that’s slightly more complicated than a simple EPS calculation. The exact formula is net income minus preferred dividends, which is then divided by the weighted average number of shares outstanding plus all options, warrants and convertible shares.