Definition of Outstanding Shares
Among the different forms in which a business is conducted, one of the most popular forms is Company Form. Under the Company form, shares are issued to the owners in proportion to the Equity capital they contributed to the business. The amount of outstanding shares at a particular point after adjusting for any shares reacquired by the company, such as Treasury stock, etc., is known as Outstanding Shares.
Explanation
It simply implies the number of shares issued and outstanding as of date. These are the number of shares held by shareholders and are actively tradable without any restrictions in the form of lock-in or anything else. Also, It is used by Analysts and even normal investors to compute various Important Financial ratios such as Earning per Share, Dividend per Share, etc., among the various ratios used by Investors to evaluate a company’s performance from an equity investment perspective.
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.
Authorized share means the total shares the company is authorized to issue as per its Memorandum of Association and Article of Association (Legal document for the company); issued share is the number of shares issued by the company. 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 2019. As of the same date, there is no treasury stock outstanding, and all the issued shares are outstanding.
The Board of Directors decided to buy back 1000 shares @ $13 per share on 25th January 2020 (The market Price of Share on that date was $10 per share).
Net Earnings by the Company for the quarter ending 31st December 2019 is $10000 and for the quarter ending 31st March 2020 is $12000.
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 2019 and 31st March 2020.
Particulars | 31st December 2019 | 31st March 2020 |
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.
Formula:
Outstanding Shares = Issued Shares – Treasury Stock
Importance
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.
Another important thing to watch with Outstanding Shares is the promoter holding, Institutional holding, and pledge created by the Promoter on their holdings, as all these factors impact the market price movement of the company and need to be taken into consideration by Investors.
Diluted Shares Outstanding
Besides ordinary shares which are outstanding (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 Earnings per Share of the company. Usually, analysts compute both EPS and Diluted EPS to provide a holistic view of the market participants about the profitability per share.
Further, the higher the diluted share outstanding, the more adverse impact it will have on the company’s earnings per share due to further dilution of equity.
Outstanding Shares vs Issued Shares
Some of the noteworthy differences between the two are enumerated below:
Basis | Outstanding Shares | 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 Outstanding Shares. |
Definition | It is equivalent to Issued Shares less any shares that have been reacquired by the business, such as Treasury Stock, etc. | Issued Shares are equivalent to Outstanding Shares plus any shares that have been 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 for the computation of 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.
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