Updated July 10, 2023
What are Weighted Average Shares Outstanding?
The term “weighted average shares outstanding” refers to the company’s effective number of shares calculated by adjusting for the changes in the number of shares during a reporting period. It is a very important metric because a company’s outstanding number of shares doesn’t remain constant and is subject to several changes during a year due to various events, such as share buyback.
Explanation
The number of outstanding shares of a company changes when it issues new shares, repurchases its shares from the market, or retires existing shares, the investors or lenders avail the option to convert their financial instruments into common equity shares. As mentioned above, the weighted average of outstanding shares calculation incorporates all the changes in the number of outstanding shares during the reporting period.
How to Calculate Weighted Average Shares Outstanding?
- First, determine the number of common equity shares at the start of the reporting period and the effective duration, usually 12 months or one year.
- Determine the change in the number of outstanding shares during the year and the nature of each change. For instance, new shares are added while the buyback of shares is deducted from the total. Again, calculate the effective duration by deducting the number of months during the year from 12 and dividing by 12.
Effective duration = (12 – No. of months already over) / 12
- One can calculate it by adding the product of several shares at each instance and their respective effective duration.
Examples
Example #1
Let us take the example of a company with 200,000 shares at the beginning of the year on January 01, 2018. During the year, issued another 100,000 shares to raise additional funds for an upcoming expansion project. The shares were issued on July 01, 2018. Determine the weighted average shares outstanding of the company at the end of the year 2018.
Solution:
Given, Shares outstanding at the start of 2018 = 200,000; Effective duration = 12/12 = 1.00
Shares issued on July 01, 2018 = 100,000; Effective duration = (12 – 6)/12 = 0.50
Calculation of Weighted Average Shares Outstanding of the company for the year 2018 is as below:
- Weighted Average Shares Outstanding = 200,000 * 1.00 + 100,000 * 0.50
- Weighted Average Shares Outstanding = 250,000
Therefore, the weighted average shares outstanding for the year is 250,000, while the total number of shares outstanding at the end of 2018 is 300,000.
Example #2
Take the example of XYZ Inc., which had 250,000 shares outstanding at the start of the financial year on January 01, 2019. On April 01, 2019, some of the company’s debenture holders decided to convert their holdings into equity shares, which increased them by 50,000. On October 01, 2019, the company purchased back 30,000 shares with surplus cash. First, determine the weighted average shares outstanding of the company during the year.
Solution:
Given, Shares outstanding at the start of 2019 = 250,000; Effective duration = 12/12 = 1.00
Shares issued on April 01, 2019 = 50,000; Effective duration = (12 – 3)/12 = 0.75
Shares bought back on October 01, 2019 = 30,000; Effective duration = (12 – 9)/12 = 0.25
Weighted Average Shares Outstandings of the company for the year are calculated as follows,
- Weighted Average Shares Outstanding = 250,000 * 1.00 + 50,000 * 0.75 – 30,000 * 0.25
- Weighted Average Shares Outstanding = 280,000
Therefore, despite having a total of 270,000 shares outstanding at the end of the year 2019, the total number of shares outstanding effectively is 280,000, which has been calculated based on each share’s origination date.
Uses of Weighted Average Shares Outstanding
Its primary purpose is to accurately capture the sufficient capital available to a company during a reporting period. The underlying concept is that various events, such as the issuance of new shares, buyback of existing shares, stock splits, share dividends, bonus issues, and conversion of warrants, cause changes in the funds available to a company. Therefore, it is crucial not to simply capture the number of outstanding shares at the end of a period, as it does not reflect what was available. Thus, it becomes evident that the company did not have the full year to utilize all the funds for business purposes.
Advantages
Some of the major advantages are as follows:
- It captures the actual number of shares outstanding that were effectively available during the reporting period.
- It can be used to compare the business performance of companies operating within the same industry.
- It helps equity investors to assess the return on investment correctly.
Conclusion
So, the number of shares outstanding of a company is a very important factor as it is used to calculate various performance metrics, such as earnings per share (EPS), which changes during a reporting period. Therefore, it makes sense to calculate the weighted average outstanding shares by incorporating the adjustments.
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