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Author: ultrabrite Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 551  
Subject: Re: Flextronics Date: 4/25/2007 9:53 PM
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Diluted Earnings Per Share - Diluted EPS

A performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities refers to all outstanding convertible preferred shares, convertible debentures, stock options (primarily employee based) and warrants. Unless the company has no additional potential shares outstanding (a relatively rare circumstance) the diluted EPS will always be lower than the simple EPS.

Investopedia Says... Remember that earnings per share is calculated by dividing the company's profit by the number of shares outstanding. Warrants, stock options, convertible preferred shares, etc. all serve to increasing the number of shares outstanding. As a shareholder, this is a bad thing. If the denominator in the equation (shares outstanding) is larger, the earnings per share is reduced (the same profit figure is used in the numerator).

This is a conservative metric because it indicates somewhat of a worst-case scenario. On one hand, everyone holding options, warrants, convertible preferred shares, etc. is unlikely convert their shares all at once. At the same time, if things go well, there is a good chance that all options and convertibles will be converted into common stock. A big difference in a company's EPS and diluted EPS can indicate high potential dilution for the company's shares, an attribute almost unanimously ostracized by analysts and investors alike.


http://www.investopedia.com/terms/d/dilutedeps.asp

I googled the term "diluted earnings per share" and found this definition. I was going to just explain it myself but then figured that by using the link you would then have access to more information if you want to browse through it.

My definition would be that diluted earnings per share is net income divided by the number of shares outstanding plus any additional shares that could be converted from outstanding stock options and convertible securities. Usually a company will report "basic" earnings per share which is net income divided by the average number of shares outstanding during the period. Then they might also report "fully diluted" earnings per share which would add in any additional shares that could be created from stock options being exercised or convertible shares and/or bonds being converted into more shares of common stock.

Hope this helps,

John
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