Diluted earnings per share (EPS) measures a company's profit allocated to each share of common stock, considering the impact of potential shares from convertible securities, stock options, and warrants, while basic EPS only accounts for currently outstanding shares. Understanding the difference is crucial as diluted EPS provides a more conservative view of a company's earnings, showing how profits would be affected if all potential shares were converted into actual shares. This distinction is particularly important for investors evaluating a company's financial health and future profitability.
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