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Divides trailing twelve-month net income by the maximum potential share count, exposing per-share earnings under the most conservative ownership dilution scenario.
Diluted EPS (TTM) is net income per share, assuming all options and other potential shares are converted. It shows how much profit is attributable to each fully diluted share.
Diluted earnings per share (EPS) measures the profit attributable to each share of common stock, assuming all potentially dilutive securities are converted to common shares. Unlike basic EPS, diluted EPS accounts for stock options, convertible bonds, warrants, and other instruments that could increase share count. This conservative measure shows the "worst case" earnings per share if all dilution occurs.
The calculation:
Diluted EPS = (Net Income - Preferred Dividends) / (Weighted Average Shares + Dilutive Securities)
For example, if net income is $500 million, basic shares are 100 million, and 10 million additional shares would come from option exercises, diluted EPS is $500M ÷ 110M = $4.55 (versus basic EPS of $5.00).
What creates dilution:
- Stock options: Employee options "in the money" (exercise price below market)
- Restricted stock units (RSUs): Unvested shares that will eventually be issued
- Convertible bonds: Debt that can convert to equity
- Convertible preferred stock: Preferred shares convertible to common
- Warrants: Rights to purchase shares at specified prices
Why diluted EPS matters:
- Realistic picture: Shows earnings power per share including future dilution
- P/E calculation: Most analysts use diluted EPS for valuation
- Compensation impact: Reveals cost of stock-based compensation to shareholders
- Convertible debt risk: Shows impact if bondholders convert
Interpreting the basic-to-diluted gap:
- Small gap (< 3%): Minimal dilution concern
- Moderate gap (3-10%): Noticeable but common for tech companies
- Large gap (> 10%): Significant dilution; investigate stock compensation practices
Track diluted EPS growth over time rather than focusing on single quarters. Consistent growth in diluted EPS, especially outpacing dilution, indicates genuine value creation for shareholders.