What it means
A stock split changes the number of shares in issue without changing the value of the company. In a 2-for-1 split, every shareholder receives two shares for each one held, and the price per share is cut roughly in half.
The problem is that old records still show the old, higher prices. If a chart compared a pre-split price of $200 with a post-split price of $100 as they stood, it would look like a 50% fall even though investors lost nothing.
Split-adjusting solves this by dividing every earlier price by the split ratio and multiplying earlier share counts by the same ratio. Data providers and company reports do this automatically, and most charting tools default to split-adjusted history.
For finance teams, the key per-share figures to adjust are the share price, earnings per share (profit divided by the number of shares), dividend per share and book value per share. Growth rates and valuation multiples such as price-to-earnings are only meaningful when every figure sits on the same share basis.
One nuance is that split-adjusted is different from dividend-adjusted, sometimes called total return adjusted. A split-adjusted price corrects only for splits, whereas a dividend-adjusted price also reduces older prices to reflect cash payments made to shareholders.
Be careful when mixing data from different sources. One provider may show split-adjusted prices while another shows the prices as originally traded, and a spreadsheet that combines both will produce nonsense.
A good habit is to write a note beside any price series saying which adjustments have been applied and as of what date the data was downloaded.
In practice
Real-world examples.
Example
An analyst downloads ten years of price history for a technology company that split its shares 3-for-1 four years ago. Using split-adjusted prices, she sees the real growth trend rather than a sudden drop in the middle of the chart.
Example
A finance manager compares earnings per share of $6.00 before a 2-for-1 split with $3.30 after it. Restated on a split-adjusted basis the earlier figure is $3.00, so earnings per share actually grew by 10%. The unadjusted comparison would have wrongly suggested a fall of 45%, which could easily lead to a wrong conclusion about the business.
Example
A private investor reviews a share he bought at $150 several years ago, before a 5-for-1 split. His split-adjusted cost is $30 per share, which is the figure to compare with today's price when judging his return. Without the adjustment, he might think he had paid five times too much per share and misjudge how well the investment has done.
Formula
Calculation
Split-adjusted price = original price / split ratio
A company completes a 4-for-1 stock split. Before the split, the share traded at $320 on a given date. Split-adjusted price = 320 / 4 = $80. If the shares now trade at $100, the stock has risen from $80 to $100, a gain of 20 / 80 = 25%, rather than appearing to have fallen from $320 to $100.Case study
Seen in the real world.
Kestrel Logistics is an illustrative, fictional listed company that completed a 2-for-1 split last year. Its investor relations team received an email from a shareholder complaining that the annual report showed earnings per share falling from $4.20 to $2.40.
The finance team explained that the prior-year figure in the new report had not been restated. After restating it on a split-adjusted basis, the prior-year figure became 4.20 / 2 = $2.10, which showed growth of about 14% to $2.40.
The illustrative lesson is that every table and chart in a report should state clearly whether figures are split-adjusted. Kestrel added a footnote and refreshed the historical data on its website. The team also added a line to its reporting checklist so that every future split triggers a restatement of the full comparative tables. The team also added a short methodology note to the investor pack explaining the adjustment, which cut the number of follow-up questions it received.
Watch out
Common mistakes.
- Comparing raw pre-split and post-split share prices and concluding that the stock has crashed.
- Adjusting only the share price and forgetting to restate earnings per share and dividends per share.
- Confusing a split-adjusted price with a dividend-adjusted price, when they correct for different events.
Questions
People also ask.
Does a split change the value of my holding?
No, the number of shares goes up and the price per share goes down by the same proportion, so the total value is unchanged at the moment of the split.
What about a reverse split?
A reverse split is adjusted in the opposite direction, so in a 1-for-10 reverse split earlier prices are multiplied by 10 to be comparable.
Do I need to adjust figures myself?
Usually not, because most data providers and annual reports already show split-adjusted history, but it is wise to check the notes.
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