One measure used to gauge a company’s profitability is earning per share. It looks at a company’s net income relative to their total shares outstanding. Diluted earnings per share is a similar measure, but it also factors a company’s dilutive securities that can be issued in the future. What are dilutive securities? Securities that can be converted into common shares – which are stocks that sometimes pay dividends and often give shareholders voting rights. Diluted shares can include both convertible bonds and employee stock options. When a business converts dilutive securities, it can lead to an increase in the number of shares outstanding. Assuming the company’s earnings stay the same, converted dilutive securities can lead to lower earnings per share. This is significant seeing as the higher a company’s EPS, the more profitable it’s said to be. That said, diluted EPS can be a more accurate measure of a company’s profitability. Calculating Diluted EPS The goal of an EPS calculation is to see what the EPS would be if dilutive shares are converted to common shares. To calculate a company’s diluted EPS, you take its