On April 01, 2019, some of the company’s debenture holders decided to convert their holdings into equity shares, which increased them by 50,000. Shares outstanding refers to the amount of stock held by shareholders, including restrictive shares held by company insiders. A company, however, may have authorized more shares than the number of outstanding but has not yet issued them. These may later appear in the form of a secondary offering, through converting convertible securities, or issued as part of employee compensation such as stock options. Due to these factors, the actual number of shares outstanding can vary over the course of a reporting period. The weighted average number of shares is determined by taking the number of outstanding shares and multiplying it by the percentage of the reporting period for which that number applies for each period.
Let us take the example of a company with 200,000 shares at the beginning of the year on January 01, 2018. During the year, issued another 100,000 shares to raise additional funds for an upcoming expansion project. Determine the weighted average shares outstanding of the company at the end of the year 2018. When divided by the 983,333 weighted average of shares outstanding, this results in $1.63 earnings per share for the year. Weighted average shares must be used when you want to find out how many common stock were in effect during a specific time frame. Common examples would be calculating the company’s earnings per share or per-day outstanding share.
Average Outstanding Shares
From the start of Q-1 to Q-4, the net dilution from the converted securities was 100,000, 120,000, 125,000, and 150,000, respectively. For simplicity, we’ll also assume the conversion of diluted securities occurs on the same dates. Those with complex structures (those that have potential dilutive securities) must report both basic EPS and diluted EPS. Weighted averages may also be used in other aspects of finance including calculating portfolio returns, inventory accounting, and valuation.
Dilution occurs when a company issues additional shares that reduce an existing investor’s proportional ownership in the company. Basic weighted average shares, on the other hand, represents the above-mentioned weighted average shares outstanding less the dilution of stock options for a specific period. It also includes shares held by the general public and restricted shares that are owned by company officers and insiders. The number of outstanding shares changes if the company issues new shares, repurchases existing shares, or if employee options are converted into shares. This potentially large range is the reason why a weighted average is used, as it ensures that financial calculations will be as accurate as possible in the event that the amount of a company’s shares changes over time.
The Scope of “Shares Outstanding”
The weighted average of outstanding shares is a calculation that incorporates any changes in the number of a company’s outstanding shares over a reporting period. The weighted average is a significant number because companies use it to calculate key financial measures with greater accuracy, such as earnings per share (EPS) for the time period. As mentioned above, the weighted average of outstanding shares calculation incorporates all the changes in the number of outstanding shares during the reporting period. So, the number of shares outstanding of a company is a very important factor as it is used to calculate various performance metrics, such as earnings per share (EPS), which changes during a reporting period. Therefore, it makes sense to calculate the weighted average outstanding shares by incorporating the adjustments.
- Consequently, the treatment of stock dividends and splits is different from the treatment used for issuances of shares in exchange for assets or services.
- Therefore, the misalignment in timing must be rectified by using the weighted average shares outstanding in the earning per share (EPS) calculation.
- In order to calculate a company’s earnings per share (EPS), a company’s net income is divided by its weighted average shares outstanding.
- Determine the weighted average shares outstanding of the company at the end of the year 2018.
If that figure is taken and used to calculate EPS, then the EPS would be much higher and it would eventually amount to polishing the financial figures. Using the SUMPRODUCT function, we’ll calculate the weighted average shares outstanding over fiscal year 2021, which comes out to 448,265. Suppose we’re tasked with calculating the weighted average shares outstanding of a public company for the fiscal year ending 2021. To achieve a proper and fair view of the changes in the number of shares and for calculation of EPS, the method of weighted average shares outstanding is used. To calculate the weighted average cost per share, the investor can multiply the number of shares acquired at each price by that price, add those values, and then divide the total value by the total number of shares. Therefore, the weighted average shares outstanding for the year is 250,000, while the total number of shares outstanding at the end of 2018 is 300,000.
We will use 562,500 because in the above calculation we assigned weights according to the time proportion that the share outstanding figure was unchanged. For example, the opening figure of 500,000 remained unchanged for 3 months (i.e., 25% of the total time of the year) until the start of second quarter, after which it changed. The numerator in the earning per share (EPS) formula is net income from the income statement, which tracks the financial performance of a company over a period of time.
Investors may choose to use weighted averages if they have compiled a position in a particular stock over a period. Given continuously changing stock prices, the investor will calculate a weighted average of the share price paid for the shares. In case there is a large difference between basic and diluted EPS, investors should be aware of the possible increase in the number of shares outstanding in the future. On the other hand, while calculating the dilutive EPS, the denominator includes all possible conversions that can take place and increase the number of shares held by parties. Diluted EPS is always less than the basic EPS, as the denominator in the latter is higher.
Free Accounting Courses
Consequently, the generally accepted accounting principles (GAAP) require the use of an average number of shares outstanding as the starting point for all denominators. Consequently, the treatment of stock dividends and splits is different from the treatment used for issuances of shares in exchange for assets or services. Of the 40,000 split shares issued on 1 April, group 2 consists of 16,000 considered to have been outstanding from 1 April to 31 December, and group 3 is composed of 24,000 that were outstanding from 1 April to 31 August. Thus, the situation during the year was equivalent to having 111,000 shares outstanding throughout the year. Group 2 consists of the 8,000 shares outstanding from 1 April to the end of the year and group 3 is the 12,000 shares outstanding from 1 April to 31 August. The weighting of each group by the fraction of the year it was outstanding is shown below.
Weighted Average Cost Per Share
Investors calculate the cost basis to determine if their investment has been profitable or not, along with any possible taxes they might owe on the investment. In this case, the same result could have been achieved by multiplying the 111,000 shares from Example 1 by a factor of 2. This shortcut is used to adjust the average outstanding shares for earlier years covered by comparative statements. Therefore, the shares outstanding after that date (and retired on 1 September) are not the same as those that existed prior to that date.