Definition
Weighted Average Shares Outstanding refers to the calculation that takes into account any changes in the amount of outstanding shares over a specific reporting period. It is computed by adjusting changes in the number of shares over time, for the respective proportion of the reporting period in which those changes occurred. It is used in calculations that involve earnings per share, net income, and other performance indicators.
Key Takeaways
- Weighted Average Shares Outstanding is a calculation used by companies to provide a more accurate snapshot of their financial performance over a given period. It accommodates changes in the amount of outstanding shares due to actions like stock buybacks, issuance of new shares, or company mergers.
- Weighted Average Shares Outstanding is crucial in the computation of earnings per share (EPS), a key indicator of profitability. By dividing the total earnings by the weighted average of shares outstanding, investors can better understand a company’s per-share earnings performance.
- It is important to differentiate between basic and diluted weighted average shares outstanding. The basic calculation only takes into account existing shares, while the diluted calculation factors in all convertible securities like options and convertible bonds, which could potentially dilute earnings per share in the future or potentially increase the number of total shares.
Importance
Weighted Average Shares Outstanding is a critical financial term because it is used in the calculation of key financial metrics such as earnings per share (EPS), which is crucial in evaluating a company’s profitability.
This measure gives a more accurate representation of the number of shares a company has over a reporting period, accounting for changes such as stock splits, share buybacks, or issuance of new shares.
By weighting the number of shares outstanding according to the length of time they were outstanding during a period, it ensures that the financial analysis reflects the most accurate and fair valuation of the company’s performance, aiding investors in making informed decisions.
Explanation
The purpose of Weighted Average Shares Outstanding is to give a more accurate reflection of a company’s financial health over a specific period of time, typically a fiscal year, rather than at a single point in time. This metric is of significant importance in financial analysis as it forms the basis for key financial performance metrics like earnings per share (EPS) and cash flow per share.
These metrics are diligently monitored by not only by company management but also by shareholders and potential investors to gauge the company’s profitability. Weighted Average Shares Outstanding comes into play when there are changes in the number of shares throughout the reporting period due to events such as issuance of additional shares, stock splits or buybacks.
In these scenarios, merely taking an average of the beginning and ending amount of outstanding shares would not give an accurate picture. By weighting the outstanding shares based on the amount of time they were outstanding, the company can provide a more accurate view of its per-share metrics.
This information can influence investment decisions, as it impacts perceived profitability and can affect the stock’s price.
Examples of Weighted Average Shares Outstanding
**Apple Inc. (AAPL)** – In its 2020 annual report, Apple reported that the weighted average number of shares outstanding was around
4 billion shares. This measure would be critical in determining earnings per share (EPS), and understanding the return a shareholder might expect.
**Amazon (AMZN)** – For fiscal year 2020, Amazon reported having, on an annual basis, a weighted average of 500 million shares outstanding. This means that over the course of the year, factoring in any changes due to buybacks or issuance of new shares, the average number used for financial calculations was around 500 million shares.
**Starbucks Corporation (SBUX)** – In its 2020 fiscal year, Starbucks reported having a weighted average of roughly
2 billion shares outstanding. This would be the number used to calculate key financial metrics like earnings per share, helping investors understand what portion of earnings they could collect based on their portion of ownership.
FAQs about Weighted Average Shares Outstanding
1. What is Weighted Average Shares Outstanding?
Weighted Average Shares Outstanding refers to the number of shares of a company calculated in accordance with the proportion of the time period where the shares were available. It is a financial metric used to compute the net earnings per share of a company.
2. How is Weighted Average Shares Outstanding different from Basic Shares Outstanding?
While Basic Shares Outstanding refers to the number of shares a company has issued, Weighted Average Shares Outstanding takes into consideration the changes in the number of shares throughout a specific period.
3. Why is it important to know the Weighted Average Shares Outstanding?
Knowing the Weighted Average Shares Outstanding is important as it provides more accurate information on a company’s earnings per share (EPS). It helps investors measure a company’s profitability relative to each outstanding share of stock.
4. How to calculate the Weighted Average Shares Outstanding?
To calculate the Weighted Average Shares Outstanding, each change in the shares outstanding during a period must be multiplied by the fraction of the period during which that change was in effect, and then the results should be totaled.
5. Is a lower Weighted Average Shares Outstanding better?
A lower Weighted Average Shares Outstanding is not necessarily better or worse. It can be better for an existing investor if the decrease is due to buybacks since their stake in the company becomes bigger. However, it could also mean that the company is struggling and has to issue fewer shares.
Related Entrepreneurship Terms
- Diluted Shares Outstanding: These are the total number of shares that would be issued by a company if all potential sources of conversion, like convertible bonds and stock options, are exercised.
- Earnings Per Share (EPS): A financial ratio calculated by dividing net income by the weighted average number of shares outstanding during a specific period.
- Basic Shares Outstanding: These reflect the total number of a company’s shares that are on the market and held by all shareholders.
- Shareholder Equity: The net worth of a company evaluated by subtracting total liabilities from the total assets. It represents the number of assets after all debts are paid off.
- Stock Split: A corporate action that increases the number of shares in a company without changing the total dollar value.
Sources for More Information
- Investopedia: Comprehensive resource for a broad range of financial information, including the topic of Weighted Average Shares Outstanding.
- Accounting Tools: Provides detailed explanations and examples of many accounting and finance topics, including Weighted Average Shares Outstanding.
- Coursera: Offers numerous online courses about finance that can provide more in-depth information about Weighted Average Shares Outstanding.
- Khan Academy: Free online learning resource that offers lessons on a wide range of subjects, including finance and capital markets, which covers topics like Weighted Average Shares Outstanding.
