What is the weighted average of outstanding shares? How is it calculated?

By Investopedia Staff AAA
A:

The amount of shares outstanding in a company will often change due to a company issuing new shares, repurchasing and retiring existing shares, and other financial instruments such as employee options being converted into shares.

The weighted average of outstanding shares is a calculation that incorporates any changes in the amount of outstanding shares over a reporting period. It is an important number, as it is used to calculate key financial measures such as earnings per share (EPS) for the time period.

Let's look at an example:
Say a company has 100,000 shares outstanding at the start of the year. Halfway through the year, it issues an additional 100,000 shares, so the total amount of shares outstanding increases to 200,000. If at the end of the year the company reports earnings of $200,000, which amount of shares should be used to calculate EPS: 100,000 or 200,000? If the 200,000 shares were used, the EPS would be $1, and if 100,000 shares were used, the EPS would be $2 - this is quite a large range!

This potentially large range is the reason why a weighted average is used, as it ensures that financial calculations will be as accurate as possible in the event the amount of a company's shares changes over time. The weighted average number of shares is calculated by taking the number of outstanding shares and multiplying the portion of the reporting period those shares covered, doing this for each portion and, finally, summing the total. The weighted average number of outstanding shares in our example would be 150,000 shares.

outstanding.gif

The earnings per share calculation for the year would then be calculated as earnings divided by the weighted average number of shares ($200,000/150,000), which is equal to $1.33 per share.

To read more, see The Basics Of Outstanding Shares And The Float.

RELATED FAQS

  1. What are the income statement presentation formats and what industries use them?

    Learn about two styles of income statements: the single-step method and multi-step method. Determine which types of businesses ...
  2. What does an income statement look like?

    Learn about the different parts of an income statement and how investors review them carefully to determine the health of ...
  3. When should I use depreciation expense instead of accumulated depreciation?

    Distinguish differences between depreciation expense, which is reported on the income statement, and accumulated depreciation ...
  4. What are the differences between percentage of completion and the completed contract ...

    Learn the advantages and disadvantages businesses face when using either the percentage-of-completion or completed contract ...
RELATED TERMS
  1. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  2. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  3. Working Capital

    This ratio indicates whether a company has enough short term ...
  4. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  5. Short Put

    A type of strategy regarding a put option, which is a contract ...
  6. Wingspread

    To maximize potential returns for certain levels of risk (while ...
comments powered by Disqus
Related Articles
  1. Pick the Right Brokerage Account for ...
    Options & Futures

    Pick the Right Brokerage Account for ...

  2. The Top Technical Indicators For Options ...
    Options & Futures

    The Top Technical Indicators For Options ...

  3. Penny Stocks, Options and Trading on ...
    Options & Futures

    Penny Stocks, Options and Trading on ...

  4. Google Stock Too Expensive For You? ...
    Options & Futures

    Google Stock Too Expensive For You? ...

  5. How To Buy Oil Options
    Options & Futures

    How To Buy Oil Options

Trading Center