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Basically its a performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Its represents a worst case scenario of EPS in case all convertible securities are exercised.
Diluted earnings per share is a measure of profit. The formula for diluted earnings per share is:
Fully Diluted Earnings Per Share = (Net Income - Preferred Stock Dividends) / (Common Shares Outstanding + Unexercised Employee Stock Options + Convertible Preferred Shares + ConvertibleDebt + Warrants)
Diluted EPS offers a clearer picture of the true shareholder base over which a company'searnings are spread. It is a classic, conservative "what-if" calculation, and for this reason manyanalysts prefer the measure to basic EPS. Diluted EPS affects a company's P/E ratio and other valuation measures, which is why shareholders generally dislike it when companies issue potentially dilutive securities.
