Diluted EPS is a financial metric used to measure a companys earnings per share (EPS) if all convertible securities were exercised. Dilutive securities are securities that are not common stock but can be converted to common stock if the holder exercises that option. If converted, dilutive securities effectively increase the weighted number of shares outstanding, which decreases EPS, thereby devaluing a shareholders existing equity stake. Diluted EPS is considered a conservative metric because it indicates a worst-case scenario in terms of EPS.

To calculate diluted EPS, the number of "diluted shares" is added to the number of outstanding shares to get a denominator of total shares. Diluted shares are the number of shares that would exist if all of a companys existing potential share obligations were issued. The formula for diluted EPS is a companys net income (excluding preferred dividends) divided by its total share count, including both outstanding and diluted shares.

Diluted EPS can provide a more accurate picture of a companys financial condition than ordinary EPS because many companies have obligations that could result in additional shares being issued. Diluted EPS is also used to compare the profitability of different companies or to assess the financial performance of a company over time.