Diluted earnings per share

diluted earnings per share

An earnings measure calculated by dividing net income less preferred stock dividends for a period by the average number of shares of common stock that would be outstanding if all convertible securities were converted into shares of common stock. Net income is adjusted for any changes that would occur because of the conversions. Diluted earnings per share is a particularly effective method of presenting earnings-per-share data for companies with complex capital structures. Compare basic earnings per share. See also dual presentation.

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Diluted earnings per share. In addition to reporting earnings per share, corporations must report diluted earnings per share. This accounts for the possiblity that all outstanding warrants and stock options are exercised, and all convertible bonds and preferred shares are exchanged for common stock.

Diluted earnings actually report the smallest potential earnings per common share that a company could have based on its current earnings. In theory, at least, knowing the diluted earnings could influence how much you would be willing to pay for the stock.