What it means
A company's authorised share capital is the maximum number of shares it is permitted to issue. Of those, the shares actually sold to investors are called issued shares.
Outstanding shares are the issued shares that remain in the hands of shareholders, which means they exclude any that the company has repurchased. The number changes over time.
It rises when the company issues new shares to raise money, to pay for an acquisition or when employees exercise share options. It falls when the company buys back shares and holds them as treasury shares or cancels them.
Outstanding shares are the base for many key figures. Earnings per share is net profit divided by the weighted average outstanding shares, and market capitalisation is the share price multiplied by the number outstanding.
Dividend per share and voting rights also depend on the count. Analysts also look at diluted shares, which add the extra shares that would exist if options, convertible bonds and similar instruments were exercised.
The diluted count is usually higher and gives a more cautious view of earnings per share. A company with many options in issue can look cheaper than it really is if only basic shares are used, so serious valuations always check the diluted figure.
For a non-finance reader, the main lesson is to watch the trend. A steady rise in outstanding shares means each existing owner's slice is getting smaller, which is called dilution.
A steady fall, as in a buyback programme, makes each remaining share a larger slice, provided the money was spent wisely and not at an inflated price. Companies report the count in several places.
The cover of a filing gives the latest figure, the balance sheet gives the number at the period end, and the earnings per share note gives the weighted average used in calculations. A careful reader checks which one is being quoted before comparing companies.
In practice
Real-world examples.
Example
A listed retailer announces a share buyback and cancels 500,000 shares out of 20,000,000 outstanding. Outstanding shares fall to 19,500,000. With profit unchanged, earnings per share rise by about 2.6%.
Example
A start-up issues 2,000,000 new shares to raise $10,000,000 for expansion, taking the number outstanding from 8,000,000 to 10,000,000. An existing investor who held 800,000 shares sees her ownership drop from 10% to 8%. She accepts this because the new money should grow the company.
Example
An analyst values a technology company at $25 per share and multiplies by the outstanding shares from the latest report. She then adds the shares from options and convertible bonds to get a diluted value, which is more cautious. The difference between the two values tells her how much of the company's worth may be claimed by option holders.
Formula
Calculation
Outstanding shares = issued shares - treasury shares
Earnings per share = net profit / weighted average outstanding shares
Market capitalisation = share price x outstanding shares
A company has issued 10,000,000 shares and holds 1,500,000 as treasury shares, so outstanding shares are 10,000,000 - 1,500,000 = 8,500,000. If net profit is $17,000,000, earnings per share are 17,000,000 / 8,500,000 = $2.00. At a share price of $40, market capitalisation is 40 x 8,500,000 = $340,000,000.Case study
Seen in the real world.
Stonehaven Instruments is a fictional manufacturer, and this story is illustrative. At the start of the year it had 12,000,000 shares outstanding and earned a profit of $24,000,000, an earnings per share of $2.00.
Mid-year, the company issued 3,000,000 shares to buy a smaller competitor. Profit rose to $27,000,000, but the shares outstanding at year end were 15,000,000, so, using the year-end count for simplicity, earnings per share fell to 27,000,000 / 15,000,000 = $1.80.
The board realised that headline profit growth of 12.5% disguised a fall in the profit attributable to each share, a drop of 10% from $2.00 to $1.80. The illustrative lesson is that growth funded by issuing shares must be judged per share, not in total.
Watch out
Common mistakes.
- Using issued shares instead of outstanding shares, which overstates the count when the company holds treasury shares.
- Ignoring options and convertibles, which can make the real number of shares larger.
- Using an old share count to calculate market value, when the number can change after issues and buybacks.
Questions
People also ask.
Where do I find the number of outstanding shares?
It is usually on the cover or balance sheet of the company's annual report and in the notes on share capital, and the latest figure is normally on the front page of the most recent quarterly filing.
What is the difference between issued and outstanding shares?
Issued shares are all shares ever sold, while outstanding shares exclude those the company has bought back and holds as treasury shares.
Why do buybacks raise earnings per share?
They reduce the number of shares, so the same profit is divided among fewer shares.
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