Every quarter companies report several variations of their shares outstanding which can create some confusion when valuing a company. There are 4 shares outstanding figures typically reported each period in a financial statement. They are:
- Basic shares outstanding
- Diluted shares outstanding
- Parenthetical shares outstanding
- Shares outstanding on the filing preparation date
Basic Shares Outstanding
Basic shares outstanding reflects the weighted average number of shares issues and outstanding for that income statement period. The figure is used to compute basic earnings per share and does not reflect the impact of dilutive securities such as stock options, warrants or convertible securities. Each period on the company’s income statement will have its own basic shares outstanding figure for that specific period.
Diluted Shares Outstanding
Diluted shares outstanding reflects the impact of any potentially dilutive securities on basic shares outstanding for computing diluted earnings per share on the income statement. For example, if a company’s stock price is at $50 and it has issued employees stock options to purchase its shares at $25, these in-the-money options will be reflected in the diluted shares outstanding as if they we excercised. This is typically done using an approach called the treasury method which effectively assumes that all in-the-money options are excecised on a cashless basis. If reported, diluted shares outstanding will always be equal to or greater than basic shares outstanding.
Parenthetical Shares Outstanding
Most companies also report the number of shares outstanding in the equity section of the balance sheet. These figures are as of the specific balance sheet dates whereas the basic and diluted shares outstanding are calculated as weighted averages for the income statement period. They represent the actual shares outstanding and do not account for any dilution adjustments.
Shares Outstanding On Filing Preparation Date
Companies filing with the SEC are required to publish the actual shares outstanding on the date their filing was prepared. This figure is typically calculated a few days before the actual filing with the SEC so it is often more current than the shares outstanding used in the face financials which may be 30 to 75 days older. Like the parenthetical shares outstanding, these figures do not account for any dilution adjustments.
Which Shares Outstanding Figure Should I Use?
Most market participants use diluted shares outstanding to calculate the market value of a company’s equity because it reflects the potential impact of dilutive securities. Using basic shares outstanding creates the potential issue of not accounting for a large number of additional shares that are likely to be issued. For example, if a company has 1 million employee stock options that are in-the-money, these shares would almost certainly be exercised if the company was sold at today’s market price. Excluding these shares from the analysis will be overstating the value received from such a sale.
Since the basic and diluted shares outstanding figures represent weighted averages for the income statement periods, there may be several different versions to choose from. This is because companies report an income statement for both the quarter and year-to-date periods in their 2nd and 3rd quarter filings. For companies with active share buyback or stock option activity, the difference between the quarterly and year-to-date figures can be material. In general, the quarterly shares outstanding figure will always be the most accurate since it represents the least averaging or smoothing.
However, this presents an interesting issue for annual (10-K) filings since the basic and diluted shares outstanding figures are weighted averages for the entire year. The annual figures may be smoothing out significant changes throughout the year. To avoid this smoothing out, you should use the average shares outstanding figure for the 4th quarter and not the full year.Since companies do not disclose their 4th quarter income statement (only annual figures are presented) 4th quarter shares outstanding figures are not a required disclosure so it usually needs to be computed.
Computing 4th Quarter Diluted Shares Outstanding
To compute diluted shares outstanding for the 4th quarter we need two figures: 4th quarter net income and 4th quarter diluted earnings per share. These figures may be found in the footnotes or they may be computed. Here is how they are computed:
4th Quarter Net Income = Annual Net Income – Net Income For The First 3 Quarters
4th Quarter Diluted Earnings Per Share = Annual Diluted Earnings Per Share – Diluted Earnings Per Share For the First 3 Quarters
Once these figures are calculated, the final step is:
4th Quarter Diluted Shares Outstanding = 4th Quarter Net Income / 4th Quarter Diluted Earnings Per Share
Note: Be sure to check the earnings per share footnote since the income statement may not include all of the items used to arrive at net income for the earnings per share calculation.
At TagniFi, we automatically compute 4th quarter diluted shares outstanding in ourTagniFi Fundamentals dataset. This data is available in ourExcel Add-Inor our API. This saves our clients time and effort in computing the most accurate shares outstanding data for their valuations.
FAQs
In general, the quarterly shares outstanding figure will always be the most accurate since it represents the least averaging or smoothing.
Do you use basic or diluted shares for valuation? ›
Using diluted shares is more informative than using basic shares because if securities are converted into shares of common stock—in other words, dilution occurs—an investor's stake in the company, or their share of the total pie, shrinks.
What is the method of valuation of outstanding shares? ›
Key things you should know about outstanding shares
The total number of outstanding shares is crucial in determining your startup's market capitalization, or the total value of its outstanding shares. To calculate market capitalization, multiply the current market share price by your startup's total outstanding shares.
What is an example of shares outstanding? ›
If it offered 300 shares in an IPO, gave 150 to the executives, and retained 550 in the treasury, then the number of shares outstanding would be 450 shares (300 float shares + 150 restricted shares).
Does the number of outstanding shares matter? ›
As noted above, outstanding shares are used to determine very important financial metrics for public companies. These include a company's market capitalization, such as market capitalization, earnings per share (EPS), and cash flow per share (CFPS). The chart below shows how each is calculated using outstanding shares.
Should I use basic or diluted shares outstanding? ›
Generally, diluted earnings per share should be used in valuing a company if you expect there will be significant dilution from employee stock options or other potential dilutive actions. Otherwise, basic earnings per share provide enough information about future cash flows.
Why use diluted shares outstanding? ›
This number of shares is needed for a company's earnings per share (EPS) calculations because applying fully diluted shares increases the share basis in the calculation while reducing the dollars earned per share of common stock.
Which stock valuation method is best? ›
The most common way of valuing a stock is by calculating the price-to-earnings ratio. The P/E ratio is a valuation of a company's stock price against the most recently reported earnings per share (EPS). Investors use the P/E ratio as a yardstick to measure a company's stock value.
What is the best formula for stock valuation? ›
The most common way to value a stock is to compute the company's price-to-earnings (P/E) ratio. The P/E ratio equals the company's stock price divided by its most recently reported earnings per share (EPS). A low P/E ratio implies that an investor buying the stock is receiving an attractive amount of value.
Is a high number of shares outstanding good? ›
Are More Shares Outstanding Good or Bad? Shares outstanding is just the amount of all the company's stock that's in the hands of its stockholders. By itself, it is not intrinsically good or bad.
Issued shares represent all the stock a company has issued. Outstanding shares, meanwhile, are the shares circulating in the market owned by investors and available for them to trade. Often, the number of issued and outstanding shares will be the same.
What is the difference between shares outstanding and shares? ›
Outstanding Shares– Key Differences. Issued shares are the total shares issued by the Company. Whereas outstanding shares are the shares with the shareholders, i.e., it does not include the shares repurchased by the Company. Thus, subtracting treasury shares from the issued shares will give outstanding shares.
What is a good PE ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.
What is the basic number of shares outstanding? ›
The basic number of shares outstanding is simply the current number of shares available on the secondary market. On the other hand, the fully diluted shares outstanding calculation takes into account diluting securities such as convertibles (warrants, options, preferred shares, etc.).
What is the average outstanding shares? ›
Average Basic Shares Outstanding are the average number of current shares in company's stock outstanding over the reporting period, before accounting for the effects of dilution from events like exercises of employee options, convertible bonds, and so forth.
What does total number of shares outstanding mean? ›
Basic outstanding shares
asic outstanding shares refer to the total number of shares issued by a company and held by investors, including shares held by institutional investors, retail investors, insiders, and others. These shares are available for trading in the stock market and are not restricted in any way.
Do you use diluted shares to calculate equity value? ›
Often used interchangeably with the term “market capitalization,” the equity value is calculated by multiplying the current stock price of a company by its total number of fully diluted common shares outstanding trading in the open markets.
Do you use basic or diluted shares for PE ratio? ›
P/E Ratio Formula
To account for the fact that a company could've issued potentially dilutive securities in the past, the diluted share count should be used — otherwise, the EPS figure is likely to be overstated.
Does equity value use diluted shares? ›
The equity value per share is the ratio between a company's market value of equity and its total number of diluted shares outstanding.
What is the difference between basic share and diluted share? ›
While basic EPS considers only the issued and outstanding Common shares of the company, the diluted EPS imputes the impact of Common share price, preferred shares, stock options, warrants, partially convertible debt, fully convertible debt etc.
