What is a split-adjusted share price?

By Investopedia Staff AAA
A:

If a company has undergone stock splits over its lifetime, comparing historical stock prices to those of the present day would not accurately reflect performance. For this reason, we must compare split-adjusted share prices.

The necessity of this adjusted price is best illustrated with an example. We'll use a fictional company, the TSJ Sports Conglomerate. Over the decades, this sports management company has grown a great deal and undergone numerous stock splits. When the company went public in 1988, its shares traded for $10. After some years, the company's share price appreciated to $50, and at that point the management felt that a 2-for-1 share split was appropriate, thus reducing the cost of a single share to $25. As time went on, the company continued to see a rising share price and, in accordance with the management's policy, the stock was split each time it reached $50. In total, the company split its shares four times since going public. Today, just after its last split, a single share of TSJ is trading at $25.

Because of all these splits, it is easy to see that the share price has appreciated much more than 2.5 times, from $10 to $25. In actuality, because TSJ has undergone four 2-for-1 splits, one original share in TSJ would be worth approximately $400 today!

No. of Shares Share Price Total Value
1 $ 10 $10
Split 1 2 $ 25 $50
Split 2 4 $ 25 $100
Split 3 8 $ 25 $200
Split 4 16 $ 25 $400
Figure 1

Figure 1 demonstrates how we reach the $400 value. If you bought and held one original share of TSJ until the present day, you would have 16 shares of TSJ (first split: 1x2=2, second split: 2x2=4, third split: 4x2=8, fourth split: 8x2=16). So, even though one of TSJ's current shares is $25, one original share is worth $400 ($25*16), and therefore appreciated 40 times ($400/$10). The TSJ is a quadruple tenbagger - a very elusive investment indeed.

For discerning and analyzing the real performance of the stock, it is standard to adjust the old prices to reflect the splits. In other words, we have to find the present equivalent of the past prices. To adjust TSJ's original price ($10), we simply divide it by the stock split (2). After four times, we get the split-adjusted price.

After the first split, the original initial public offering (IPO) price of $10 would be divided by two, giving a split-adjusted price of $5.

No. of Shares Adjusted Price Total Value
1 $10 $10
Split 1 2 $5 $10
Split 2 4 $2.50 $10
Split 3 8 $1.25 $10
Split 4 16 $0.625 $10
Figure 2

Figure 2 demonstrates how the original $10 price is adjusted after each split - so, after the fourth split, the original $10 price is equivalent to $0.625 today. If you were to look at a stock chart of TSJ that went back to its initial offering, the first day trading would be shown at $0.625, even though the stock never really traded at this price.

It's important to remember that the split creates no value. Notice how the column on the very right is simply the product of multiplying the number of shares by the split-adjusted price. The gain of 40 times we saw before was the result of growth, not splits.

For more information, see Understanding Stock Splits and What is a stock split? Why do stocks split?

RELATED FAQS

  1. Does investing in small cap stocks have advantages over investing in big cap stocks?

    Learn about the advantages of investing in small-cap stocks, and find out why some investors buy shares in small-cap rather ...
  2. What are the macroeconomic effects of allowing stock buying on margin?

    Learn about the macroeconomic effects of allowing stock purchases on margin, such as increasing present access to investment ...
  3. Why would you look at year-over-year rather than quarterly growth?

    Find out why year-over-year growth analysis is more common than quarterly growth analysis in stock valuation and why investors ...
  4. Where on the internet can I look up price to sales ratios for specific companies?

    Learn what price-to-sales ratio is, how investors can use it to compare different companies in the same sector and which ...
RELATED TERMS
  1. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  2. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  3. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...
  4. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  5. StockCharts Technical Rank (SCTR)

    A technical ranking for stocks within a group, created by John ...
  6. Net Present Value - NPV

    The difference between the present value of cash inflows and ...

You May Also Like

Related Articles
  1. Charts & Patterns

    Why These Could Be 2015's 10 Best Biotech ...

  2. Charts & Patterns

    Why These Could Be 2015's 10-Best Media ...

  3. Stock Analysis

    Is This Dividend Stock A Value Or Value ...

  4. Charts & Patterns

    Why These Could Be 2015's 10-Best Pharma ...

  5. Charts & Patterns

    Why These Are 2015's 10-Best Financial ...

Trading Center