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What is Weighted Average Shares Outstanding?
Weighted average shares outstanding is a number of shares of the Company after incorporating changes in the shares during the year. The number of shares of a Company can vary during the year due to various reasons like buyback of shares, new issue of shares, share dividend, stock split, conversion of warrants etc. Thus, while calculating Earnings per Share the Company needs to find the weighted average number of shares outstanding. Thus, calculation of weighted average outstanding shares incorporates all such scenarios of changes in the weighted average number of shares to give a fair Earnings per share value.
Steps to Calculate Weighted Average Shares Outstanding
Following are the three steps to calculate weighted average shares outstanding.
- The first step is to find the common shares count at the beginning of the year along with teh changes in common shares during the year.
- Calculate the updated common shares after each change.
- Issuance of new shares increases the common share count
- Repurchase of shares reduces the common share count.
- Weight the shares outstanding by the portion of the year between this change and next change: weight = days outstanding / 365 = months outstanding / 12
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Weighted Average Shares Oustanding Calculation
Let us consider the following example and incorporate various scenarios which can affect the weighted average number of shares outstanding.
#1 – No New Shares Issued
Let there be a Company A which has 100 thousand shares outstanding at the start of the year i.e. 1 January. The Company did not issue any new shares.
- Thus, weighted average shares outstanding = (100000 X 12)/ 12 = 100000
We multiplied the number by 12 for each month and did an average over these 12 months. Since no new shares were issued in this case each month had 100 thousand shares outstanding and hence, over the year the Company had 1 thousand shares outstanding.
#2 – The Company Issues New Shares Once During the Period
Now, the Company A issued 12 thousand new shares on 1 April.
- Thus, the Company had 100 thousand shares for the first 3 months and 112000 shares for the rest of the 9 months.
- Thus, weighted average shares outstanding in this case = (100000*3 + 112000*9)/12 = 1308000/12 = 109000
- Thus, weighted average shares outstanding in this case, the Company has 109,000 shares outstanding at the end of the year.
Clearly, we pro-rated the weighted average number of shares according to their duration or to put it in the simple way the funds generated from issuing new shares were available to the Company for 9 months only, hence these number was pro-rated.
#3 – Company Issues New Shares Twice During the Year
The Company A issued another 12 thousand shares on 1 October during the year. Let us seen how the weighted average number of shares outstanding will change.
- Thus, the Company has 100 thousand shares during the first 3 months, 112000 shares during the next 6 months and 124000 shares during the last 3 months of the year
- Thus, weighted average shares outstanding in this case = (100000*3 + 112000*6 + 124000*3)/12 = 1344000/12 = 112000
- Thus, weighted average shares outstanding in this case, the Company has 112,000 shares outstanding at the end of the year.
- Hence, from this example, we can say whenever there is the new issuance of share we will add them to the existing number of shares and prorate during the part of the year they were available for the Company.
However, the case changes whenever the Company does a stock split or a share reverse.
First, let us consider the Company has done a stock split.
#4 – The Company has Split the Shares in the Ratio 1:2
Now, taking on from the above scenario, the Company did a split of shares in the ratio 1:2 i.e. an investor received 1 extra share for one share each.
Let the Company A split the shares on 1st December.
- Now, in such a case, all the previous shares in the Company are also multiplied by 2. This is because the value of the shares is the same before and after the stock split. The investor does not lose or gain by such measure.
- Hence, the weighted average number of shares will be = (200000*3 + 224000*6 + 248000*3)/12 = 2688000/12 = 224000
- Thus, the weighted average number of shares outstanding has also doubled by doing a stock split.
Now, let us consider the scenario of a share reverse. A share reverse is nothing but opposite of the stock split. If the investor holds 2 shares in the Company, he will now have 1 share.
#5 – The Company has done a Share Reverse in the Ratio 2:1
Now, taking on from the above scenario, the Company did a share reverse in the ratio 2:1 i.e. an investor will now have 1 share for every 2 shares held in the Company
Let the Company A did a share reverse on 1st December.
- Now, in such a case, all the previous shares in the Company are divided by 2.
- Hence, the weighted average number of shares will be = (50000*3 + 56000*6 + 62000*3)/12 = 672000/12 = 56000
- Clearly, after share reverse, the number of outstanding shares has halved.
#6 – The Company has Bought Back Shares
We have seen various corporate actions above and their treatment of the weighted average outstanding shares. Now, let us look into buyback of shares. If the Company buys back the shares, they are treated in the similar way as the shares are issued but in the opposite, that the shares are reduced from the calculation.
From the scenario 3, the Company A buys back 12000 shares on 1 October.
- Thus, the Company has 100 thousand shares during the first 3 months, 112000 shares during the next 6 months and 100000 shares again during the last 3 months of the year
- Thus, weighted average shares outstanding in this case = (100000*3 + 112000*6 + 100000*3)/12 = 1272000/12 = 106000
- Thus, the Company has 106,000 shares outstanding at the end of the year.
Weighted Average Share Calculation Example #1
Below is the example of Weighted Average Shares calculation when shares are issued as well as repurchased during the year.
Below table shows the weighted averages shares outstanding calculation in a tabular format.
Weighted Average Share Outstanding Calculation Example #2
This second example of weighted average shares outstanding calculation considers the cases when shares are issued and stock dividends are given during the year.
Below table shows the weighted averages shares outstanding calculation in a tabular format.
Weighted average outstanding shares is an important factor while calculation Earnings per share for the Company during the period of time. Since, the number of shares of the Company keeps changing due to various corporate actions like new issue of shares, buyback of shares, stock split, stock reverse etc. and the new shares or the shares bought back were available with the Company for a proportion of the year, it makes sense to prorate the shares to find a weighted average.
This has been a guide to what are weighted average shares outstanding. Here we look at the steps to calculate weighted average shares outstanding in cases of share issuance, share repurchase, stock dividends, stock splits, share reverse and more. You may have a look at these articles below to learn more about accounting –