A company’s outstanding shares count can change several times throughout the year depending on its corporation actions like buyback, conversion, new issues, etc. This can cause potential distortions in financial performance metrics like earnings per share (EPS). Weighted Average Shares Outstanding smooths out such fluctuations and gives the average number of common shares a company has issued during a given reporting period.
This article provides a clear explanation of what Weighted Average Shares Outstanding means.
Key Takeaways
- Weighted Average Shares Outstanding represents the time-weighted average number of common shares a company has in circulation during a reporting period.
- It accounts for stock splits, buybacks, new issuances, and conversions, preventing distortions in financial metrics.
- While shares outstanding shows the total at a point in time, weighted average shares smooths changes across the period.
Weighted Average Shares Outstanding Meaning
Weighted Average Shares Outstanding refers to the average number of common shares a company has issued and has in circulation during a given reporting period.
This count adjusts for various corporate actions such as stock splits, dividends, new share issuances, stock buybacks, and conversions of dilutive securities like options or convertible bonds.
By smoothing out the fluctuations in share count throughout the period, this measure prevents potential distortions in financial performance metrics.
Shares Outstanding vs Weighted Average Shares
Shares outstanding represents the total number of shares currently issued by the company, including those held by the public, insiders, and restricted shareholders. This number often changes over time due to stock issuances, repurchases (buybacks), and the conversion of securities such as employee stock options.
In contrast, the weighted average shares outstanding factors in these fluctuations by weighting the share counts according to the length of time they were outstanding during the reporting period.
For example, if a company had 1 million shares for the first half of the year and 2 million shares for the second half, the weighted average would be 1.5 million shares.
Why Weighted Average Shares Outstanding Matters and How To Use It?
Using a simple shares outstanding number at the start or end of the reporting period can misalign earnings and share count timing, distorting EPS and misleading investors.
However, weighted average shares outstanding better reflects the true changes in a company’s equity base, helping investors track dilution or consolidation of ownership.
It is essential for accurate financial analysis, particularly when calculating basic earnings per share (EPS).
Since net income is measured over the full reporting period, pairing it with a time-weighted share count ensures accuracy. Diluted EPS further adjusts this figure to account for potential shares from convertible securities.
It is especially useful for investors who purchase shares at different times and prices, as it provides a clearer picture of ownership and earnings attribution. It also helps analysts more accurately compare financial results across different periods or companies.
Conclusion
Weighted Average Shares Outstanding is a key financial metric that normalises changes in outstanding shares over a reporting period to provide an accurate denominator for calculating earnings per share.
Understanding this concept helps investors better analyzse a company’s performance and capital structure changes over time.
FAQs
What is the difference between shares outstanding and weighted average shares?
Shares outstanding is the total shares currently issued, while weighted average shares account for changes throughout the reporting period, weighting them by time.
Why is weighted average shares important for EPS?
It aligns the share count in the EPS calculation with the net income period, offering a fairer representation of earnings per share.
How do stock buybacks affect weighted average shares?
Buybacks reduce the number of shares outstanding, which lowers weighted average shares and can increase EPS.
Who uses weighted average shares outstanding?
Analysts, investors, and accountants use it to assess a company’s profitability and perform financial analysis.
