Whereas the earnings per share takes the company?s earnings and dividends it by the number of shares out there, the diluted earnings per share takes the earnings of the company and dividends it by the theoretical number of shares that could possibly exists.
Some investors hold things such as stock options, grants, and convertible bonds, all of which can be exchanged for stocks, this creates more shares. The Diluted Earnings Per Share takes into consideration the worst case scenario where everyone who holds one of these securities exercises them and creates new shares in the market, thus driving down the earnings per share.
