How are convertible bonds treated when calculating diluted shares?

When calculating diluted shares, convertible bonds are treated based on their potential conversion into equity. If the current share price is lower than the conversion price, it indicates that converting the bonds into shares would not be financially beneficial for the bondholders. Therefore, under these circumstances, the bonds are not converted, and their potential dilution is ignored. However, when the share price rises above the conversion price, bondholders are likely to convert their bonds into shares, leading to an increase in the outstanding shares. Thus, in diluted share calculations, the bond conversion effects are only considered if it diminishes the earnings per share (EPS) metric, which typically occurs when the current share price exceeds the conversion price. This dynamic illustrates why the choice aligns well with the principles of share dilution measurement.