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The Company form, which is one of the most popular forms of conducting business, issues shares to the owners in proportion to the Equity capital they contributed to the business. The owners hold the outstanding shares at a particular point after adjusting for any shares reacquired by the company, such as Treasury stock, etc.Explanation
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It is important to note that there are various categories of Shares, such as Authorized Shares, Issued Shares, and Outstanding Shares, although all the company shares differ in terms of purpose.
According to its Memorandum of Association and Article of Association (legal documents), the company authorizes a certain number of shares to be issued. In contrast, the company issues a specific number of shares. Outstanding Shares are the number of shares available after adjusting for any Treasury stock, Preference shares, etc.How to Calculate Outstanding Shares?
Let’s understand how to calculate it and how it affects Earnings Per Share with the help of an example:
ABC Limited has an Authorized Share Capital of $100000 comprising 10000 shares of Face Value of $10 each. The company has an issued share capital of 8000 shares as of 31st December 2023. As of the same date, no treasury stock is outstanding, and all the issued shares are outstanding.
The Board of Directors decided to buy back 1000 shares @ $13 per share on 25th January 2023 (The market Price of Share on that date was $10 per share).
Based on the above information, let’s compute the number of Outstanding Shares and their impact on the Earnings per share of the company as of 31st December 2023 and 31st March 2023.
31st December 2023
31st March 2023
Net Earnings (A) $10,000 $12,000
Issued Shares (B) 8000 8000
Treasury Stock (C) 0 0
Share bought back (D) 0 1000
Outstanding Shares (E) = (B – C -D) 8000 7000
Earnings Per Share (EPS) (F) = (A / E) $1.25 $1.71
Thus, we can see how a change in Share Outstanding impacts the Earnings Per Share for the company and consequently impacts the company’s valuation.
Outstanding Shares = Issued Shares – Treasury StockImportance
It is important to keep a close watch on the company’s Outstanding Shares as this number doesn’t remain static and keeps changing on account of new issues and repurchasing by the company more often. Further, investors must watch the new shares issued, diluting the value.Diluted Shares Outstanding
Besides outstanding ordinary shares (Also known as Basic Shares), a company also issues stock options and warrants to its employees and other stakeholders, which are either locked in for a certain period (normally in the case of Employee Stock option schemes) or convertible at a prefixed conversion price after a particular period (Convertible Debentures, FCCB, Quasi Equity, etc.). To provide a fair view of the performance, companies usually compute both Basic and Diluted Shareholding.
Diluted Share Outstanding is an important yardstick that impacts the company’s Earnings per Share. Usually, analysts compute both EPS and Diluted EPS to provide a holistic view of the market participants about the profitability per share.Outstanding Shares vs Issued Shares
Scope It is always less than or equal to Issues Shares. It can never be more than Issued Shares. Issued Shares are always greater than or equal to Outstanding Shares. It can never be less than it.
Definition It is equivalent to Issued Shares less any shares reacquired by the business, such as Treasury Stock, etc. Issued Shares are equivalent to Outstanding Shares plus any shares reacquired by the business, such as Treasury Stock, etc.
Rights Outstanding Shareholders have always been entitled to dividends and voting rights. Issued shares are not always entitled to dividends and voting rights.
Calculation of Financial Ratios It is used to compute Earnings Per Share (EPS), Dividend per Share (DPS), and other performance benchmarks. Issued Shares are not used for this purpose.Conclusion
An outstanding Share is an important number closely tracked by investors and analysts following various companies. It impacts the earnings available to common shareholders of the company and the free float of shares in the market. In addition, it keeps changing depending upon the company’s new issuance, buyback, or conversion of warrants and other convertible Bonds into common equity. Such actions impact the Share Price as some are value accretive while others are dilutive. Overall, it helps determine the company’s market capitalization, which impacts the classification of the business.Recommended Articles
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