Why should convertible bonds be eliminated from calculations of net debt when considering diluted shares?

Convertible bonds should be eliminated from calculations of net debt when considering diluted shares primarily to prevent double counting. This is because convertible bonds have the potential to be converted into equity shares. When analyzing diluted shares, which account for all potential future shares that could be issued, it’s important to recognize that including the value of convertible bonds in net debt could mistakenly inflate the perceived liability of the company.

By removing convertible bonds from net debt calculations, one can accurately reflect the company's financial obligations without duplicating the effect of these bonds, which may already be accounted for in the share count when considering conversions. This approach ensures that financial metrics reflect a clearer picture of the company’s capitalization structure, providing investors with accurate information regarding the potential dilution of equity and the company's true financial health.