Diluted Earnings Per Share (diluted EPS) is a company's earnings per share

Earnings per share

Earnings per share is the amount of earnings per each outstanding share of a company's stock.In the United States, the Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations,...

 (EPS) calculated using fully diluted shares

Share (finance)

A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...

 outstanding (i.e. including the impact of stock option grants and convertible bond

Convertible bond

In finance, a convertible note is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features...

s). Diluted EPS indicates a "worst case" scenario, one in which everyone who could have received stock without purchasing it directly for the full market value did so.

To find diluted EPS, basic EPS is calculated for each of the categories on the income statement

Income statement

Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...

 first. Then each of the dilutive securities

Security (finance)

A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

 are ranked based on their effects, from most dilutive to least dilutive and antidilutive. Then the basic EPS number is diluted one by one by applying each one, skipping any instruments that have an antidilutive effect.

Calculations

Calculations of diluted EPS vary. Morningstar

Morningstar, Inc.

Morningstar, Inc. is an independent investment research company based in Chicago, Illinois, USA.-Businesses:Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for...

 reports diluted EPS "Earnings/Share $", which is net income minus preferred stock dividends divided by the weighted average of common stock shares outstanding over the past year; this is adjusted for dilutive shares. Some data sources may simplify this calculation by using the number of shares outstanding at the end of a reporting period.

International financial reporting standards

Under International Financial Reporting Standards

International Financial Reporting Standards

International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....

, diluted earnings per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential common stock

Common stock

Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...

. Dilutive potential common stock includes:

• convertible debt
• convertible preferred shares
• share warrants
• share options
• share rights
• Employee StockPurchase Plans
• contractual rights to purchase shares
• contingent issuance contracts or agreement