Shares Outstanding

In financial analysis, understanding the shares outstanding is fundamental to gauging a company's market value and shareholder equity. The two forms of shares outstanding—basic and diluted—are used to calculate market capitalization and earnings per share (EPS). This article will unpack these terms, illustrating their impact on financial health and corporate decision-making.

What are Shares Outstanding?

Shares outstanding are the total shares of a company currently held by shareholders, including those owned by institutional investors, company officials, and the public. This count, which excludes company-owned treasury shares, is critical for understanding a company's market capitalization and equity structure.  It is calculated by subtracting treasury shares from total issued shares:

Shares Outstanding = Total Issued Shares − Treasury Shares

Shares outstanding adjusts with corporate events like stock issuances or buybacks. New share issuances may dilute value, while buybacks can concentrate it, reflecting strategic financial moves such as fundraising or mergers.

Basic and Diluted Shares Outstanding

Shares outstanding exist in two forms: basic, which includes all shares currently held by investors, and diluted, which also accounts for shares that could be issued through the conversion of instruments like options or warrants. 

Basic shares serve as the standard for basic EPS calculation, showing profitability per existing share, while diluted shares present a broader scenario, potentially lowering EPS due to the inclusion of convertible instruments. The variance between the two measures of EPS can signal the risk of future dilution and its possible effect on share value.

Shares Outstanding vs Floating Shares

When evaluating a company's stock, it's important to distinguish between shares outstanding and floating shares, as these figures provide insights into the stock's liquidity and voting power.

• Shares Outstanding: This represents the total number of shares a company has issued. It includes shares held by institutional investors, company insiders, officers, and the public. The number of outstanding shares is used for calculating market capitalization and earnings per share, serving as a denominator in these equations. However, not all outstanding shares are available for public trading, which brings us to the concept of floating shares.

• Floating Shares: Floating shares are a subset of outstanding shares. They exclude shares held by insiders, officers, and controlling investors, reflecting only those available for public trading. As such, it offers a clearer view of a stock's true liquidity. A smaller float can mean more volatility in stock prices, while a larger float suggests more stability.

For instance, a company with 1 million shares outstanding might only have 300,000 shares as float if the rest are locked in by insiders and institutions. In such cases, even a small amount of buying or selling activity can lead to significant price movements due to the limited number of shares available for trading.

What is a Share Repurchase?

A share repurchase, or buyback, occurs when a company decides to buy its own shares from the marketplace. This action reduces the number of shares outstanding, which can have several effects on the company's financial metrics and shareholder value, such as:

• EPS Impact: Share repurchases typically boost Earnings Per Share (EPS) as the total profit is divided among fewer shares, assuming stable net income.
  
• Market Perception: Buybacks often indicate the company's confidence in its stock value, potentially leading to price increases as the market adjusts to the reduced share supply.
  
• Financial Flexibility and Tax Benefits: Repurchases provide a versatile way to distribute excess cash to shareholders, potentially offering tax advantages compared to dividends.

To understand this more deeply, let’s consider the case of a hypothetical company called XYZ that decides to initiate a share repurchase program. At the start of the year, XYZ has 1 million shares outstanding and a share price of $10, giving it a market capitalization of $10 million. The company earns a net income of $1 million, so its EPS is $1.00.

XYZ then buys back 100,000 shares at $10 per share, spending $1 million of its cash reserves. After the buyback, the company has 900,000 shares outstanding. If the net income remains at $1 million, the new EPS would be approximately $1.11 ($1 million / 900,000 shares). This represents an 11% increase in EPS, solely due to the reduction in the number of shares outstanding. 

Now, imagine you are one of the shareholders in XYZ that did not sell their shares as part of the buyback program. From your perspective, you now own a larger percentage of the company, since the total number of shares outstanding has declined. Since EPS increased, it is likely that the market value increased as well (although in the real world this is not guaranteed). And since you did not actually receive any dividends, you do not need to pay any taxes even though your wealth increased as a result of the higher share price.

Stock Splits and Their Impact on Shares Outstanding

A stock split is an action taken by a company to divide its existing shares into multiple shares. Although the number of shares outstanding increases, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value. The intrinsic value of the company doesn't change, but the split can affect some of the stock's metrics, including its share price.

Why Companies Do Stock Splits

• Share Price Management: Companies may conduct a stock split to lower the price of each share, making the stock more accessible to a wider range of investors.

• Liquidity Enhancement: More shares outstanding mean higher liquidity, which translates into smaller price changes with buy or sell orders, making the stock more attractive to investors.

Implications of a Stock Split

• Perceived Affordability: The lower post-split price is often seen as more affordable, even though the underlying value of the company remains constant.

• No Change in Value: A stock split does not change the market capitalization of a company. For example, if a company valued at $100 million with 1 million shares outstanding ($100 per share) performs a 2-for-1 stock split, it will then have 2 million shares outstanding, but the share price will be $50.

To illustrate this, let's take a hypothetical company, ABC Inc., which has 2 million shares outstanding trading at $150 per share, leading to a market capitalization of $300 million. ABC Inc. decides to perform a 3-for-1 stock split. Post-split, the number of shares outstanding will increase to 6 million shares, while the share price adjusts to $50 per share. The market capitalization remains the same at $300 million.

The split itself doesn't directly affect the company's value but can indirectly influence investor perception and stock price. If the stock becomes more appealing and demand increases due to the lower price, the market capitalization could rise as a result of the stock split.

Where to Find Shares Outstanding

The number of shares outstanding for a publicly-traded company is reported in its periodic filings with the Securities and Exchange Commission (SEC), particularly in the annual report known as Form 10-K. These documents provide not just the raw number of shares but also a context for understanding changes over time due to corporate actions such as stock splits, buybacks, or issuance of new shares.

Let’s examine how to do this using Apple’s 10-K filing for the fiscal year ended September 30th, 2023. The simplest way to obtain the shares outstanding is to look directly on the first page, right before the table of contents. In the case of Apple, this shows that the company had 15,552,752,000 shares of common stock “issued and outstanding” as of October 20th, 2023.

If we want to find more details, a great way to do so is to look for an explanation of how the company calculated their own EPS. This is usually disclosed in the section “Notes to Consolidated Financial Statements”. In this instance, we can find what we’re looking for on page 35:

As we can see here, Apple’s basic and diluted EPS both increased year-over-year, even though their net income slightly declined. This is because they were able to decrease their shares outstanding to a greater degree than their decline in earnings. This is a great example of how share-count reductions can be an important tool for management teams to deliver value to shareholders.

Key Takeaways

Understanding shares outstanding is important as it can significantly impact a company's market valuation financial ratios.

• Shares Outstanding: A measure of a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by insiders.

• Financial Metrics: The number of shares outstanding is pivotal for calculating market capitalization, earnings per share (EPS), and other key financial ratios.

• Corporate Actions: Fluctuations in shares outstanding result from stock splits, buybacks, and equity issuance, each signaling different corporate strategies.

Overall, the shares outstanding offer a snapshot of a company’s equity structure and provide insights into its financial strategies. It is a key data-point that is widely used when making investment decisions.

Additional Resources

If you found this article useful, consider checking out our Financial Accounting Essentials where you'll learn how to build a balance sheet, income statement, and cash flow statement from scratch based on a set of transactions. You'll also learn to find, read, and analyze the financial statements of real companies such as Microsoft and PepsiCo. Students who have taken this course have gone on to work at Barclays, Bloomberg, Goldman Sachs, EY, and many other prestigious companies. Get started now!

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