Why might the number of shares issued be more than the number of shares outstanding?

What are Shares Outstanding?

Shares Outstanding represent all of the units of ownership issued by a company, excluding any shares repurchased by the issuer [i.e. treasury stock].

Table of Contents

• How to Calculate Shares Outstanding
• Shares Outstanding Formula
• Different Classes of Share Issuances
• Shares Outstanding in Financial Metrics
• Shares Outstanding in Valuation
• New Share Issuances and Share Buybacks [Repurchases]
• Stock Splits and Reverse Stock Splits

The term shares outstanding is defined as the total number of shares a company has issued to date, after subtracting the number of shares repurchased.

However, typically there are multiple different share types with varying:

• Voting Rights
• Dividend Preferences
• Priorities in the Event of Liquidation

In the US, public companies are obligated to report their number of shares outstanding as part of the SEC’s filing requirements.

The number of shares outstanding of a company can be found in its quarterly or annual filings [10-Qs or 10-Ks].

However, due to the fluctuations in share counts between reporting periods, the figure is typically expressed as a weighted average.

The formula for calculating the shares outstanding consists of subtracting the shares repurchased from the total shares issued to date.

Shares Outstanding Formula

• Shares Outststanding = Shares Issued – Shares Repurchased

Issuances of shares can come in several forms, such as:

• Ordinary Shares: The most common form of outstanding shares, ordinary shares typically offer investors one vote per share and equal access to dividends.
• Preferred Shares: Shares allow investors access to a preferred dividend, meaning they receive a dividend before common shareholders. Despite preferred shares typically having fewer voting rights than common shares, they carry higher priority in the event the company becomes insolvent.
• Deferred Shares: Shares with fewer voting rights and less access to dividends.
• Non-Voting Shares: Typically issued to employees, these shares are similar to common shares but without access to voting rights.
• Redeemable Shares: Shares that can be repurchased by the company at some point in the future.
• Management Shares: Shares with extra voting rights compared to other classes, such as having two votes per share rather than one.
• Alphabet Shares Alphabet shares are offerings with different rights and qualities assigned to different classes of shares. For example, a company’s class A shares may carry more voting rights but have less access to dividends than a company’s class B shares.

Shares outstanding are the basis of several key financial metrics and can be useful for tracking a company’s operating performance.

Two different ways to analyze a company through its shares outstanding are earnings per share [EPS] and cash flow per share [CFPS].

1. Earnings Per Share [EPS] – Calculated by taking a company’s net income and dividing it by the number of shares outstanding. The result allows investors to see how much of a company’s earnings that each outstanding share is entitled to [and EPS can be presented on either a “basic” or “diluted” basis].
   • • Basic EPS – Counts only common shares and no other potentially dilutive securities.
     • Diluted EPS – Considers all classes of shares, including potentially dilutive securities like convertible bonds – for that reason, the basic EPS will be higher than diluted EPS.
2. Cash Flow Per Share [CFPS] – Calculated by dividing the company’s after-tax earnings [with depreciation and amortization added back] by its shares outstanding.

Shares Outstanding in Valuation

Shares outstanding are used to determine a company’s market capitalization, i.e. the total value of a company’s equity, or equity value.

Market capitalization is calculated by multiplying the company’s share price by its shares outstanding.

Market Capitalization Formula

• Market Capitalization = Share Price * Number of Shares Outstanding

For example, the price-to-earnings [P/E] ratio calculates how much investors are paying for $1 of a company’s earnings by dividing the company’s share price by its EPS.

Another metric calculated using shares outstanding is the price-to-book [P/B] ratio.

P/B is often used to value companies in the financial sector [i.e. banks] and is calculated by taking a company’s share price and dividing it by the book value per share.

Since the book value per share is found by taking the company’s book value of equity [i.e. its assets minus its liabilities], shares outstanding influence a company’s book value and appear in the ratio’s denominator.

A publicly-traded company can directly influence how many shares it has outstanding.

The company can increase or decrease the number of shares outstanding by issuing new shares or via share repurchases [buybacks].

• New Share Issuances: If a company issues more shares, its earnings per share [EPS] becomes more diluted [and declines in value] because the ratio’s denominator has increased. From the dilution in ownership, each shareholder is then entitled to a smaller proportion of earnings, which investors often view negatively.
• Share Buybacks: On the other hand, share buybacks are often viewed positively by investors. When a company buys back its shares, it not only allows investors to be entitled to more EPS but can also signal to investors that the company believes its current share price is undervalued [and believes it will rise in the future].

Stock Splits and Reverse Stock Splits

Stock splits and reverse stock splits are other methods for companies to alter their shares outstanding, since rather than creating new shares or buying back existing ones, these actions affect shares that are already on the market without any change in economic value.

• Stock Split: A stock split occurs when the company decides that every share on the market will be divided into a certain number of shares. For example, if a company ordered a 2-1 stock split while its share price was $500 and it had 50,000 shares outstanding, each share would now be worth $250, and there would be 100,000 shares outstanding. Stock splits can be useful for companies with extremely high stock prices, as a higher share price limits the universe of retail investors that are able to purchase shares.
• Reverse Split: As its name implies, a reverse stock split works in the opposite way that stock splits do. For example, if a company’s shares were trading for $500 with 50,000 shares outstanding, the company could order a 1-2 reverse split, making each share worth $1,000 but resulting in only 25,000 shares outstanding. While both types of stock splits can affect a company’s share price [due to the market’s perception of the actions], the market capitalization impact should be neutral in theory.