Diluted Earnings Per Share equals net income divided by the number of all possible or convertible shares outstanding
Diluted Earnings per share is a more conservative version of standard earnings per share. Standard EPS only takes into account, as the denominator, all current shares outstanding. However, this is misleading as it does not factor in all stock options, warrants, preferred stock, or convertible bonds that could theoretically be exercised to dilute the total number of shares outstanding.
Diluted EPS can be considered a significantly more conservative version of EPS in that it presents what the EPS would be were every single possible potential share that could be converted into an outstanding share.