Diluted earnings per share is earnings per share that fully reflects the impact the firm's dilutive securities (eg, convertible bonds) may have on earnings per share. Diluted earnings per share is distinguished from basic earnings per share, both of which are computed by dividing net income by the weighted average number of outstanding shares. But only diluted earnings per share assumes the exercise of stock options and warrants, and the conversion of convertible bonds and preferred shares, in computing outstanding shares. Because diluted earnings per share entails spreading net income over more outstanding shares, the additional equity dilutes (ie, reduces) earnings on a per-share basis. Diluted earnings per share is thus the more conservative measure of earnings per share.
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