Adjusted outstanding shares: Meaning, Criticisms & Real-World Uses

What Is Adjusted Outstanding Shares?

Adjusted outstanding shares, a concept within corporate finance, refer to the total number of a company's shares of stock currently held by all shareholders, with modifications made to account for certain corporate actions or accounting standards. This figure differs from a simple count of shares outstanding as it aims to provide a more accurate representation of the shares used in specific financial calculations, such as earnings per share (EPS) or diluted earnings per share. The adjustment typically involves factors like stock splits, stock dividends, reverse stock splits, and the potential conversion of dilutive securities.

History and Origin

The concept of adjusting outstanding shares largely evolved with the development of financial reporting standards aimed at providing investors with clearer and more comparable financial metrics. The International Accounting Standards Board (IASB) issued International Accounting Standard (IAS) 33, "Earnings Per Share," which provides detailed guidance on the calculation and presentation of earnings per share, including the determination of the weighted average number of ordinary shares outstanding. This standard was reissued in December 2003 and became applicable for annual periods beginning on or after January 1, 2005.¹⁴, ¹⁵, ¹⁶ This formalization underscored the importance of a consistently determined denominator for performance comparisons between different entities and reporting periods.¹², ¹³

Key Takeaways

Adjusted outstanding shares provide a refined count of a company's shares for specific financial calculations.
The figure accounts for corporate actions like stock splits, stock dividends, and reverse stock splits.
It is crucial for accurate calculation of metrics such as basic and diluted earnings per share.
Adjustments also consider the impact of dilutive securities like convertible bonds and stock options.
The value can fluctuate over time due to share buybacks or new share issuances.

Formula and Calculation

The calculation of adjusted outstanding shares, particularly for metrics like earnings per share, often involves the weighted average number of shares outstanding over a period. This is because the number of shares can change throughout a reporting period due to various corporate actions.

For basic earnings per share, the formula uses the weighted average number of ordinary shares outstanding:

\text{Basic EPS Denominator} = \text{Weighted Average Number of Ordinary Shares Outstanding}

For diluted earnings per share, the formula adjusts the weighted average number of ordinary shares outstanding to include the effect of all dilutive potential ordinary shares. These adjustments consider instruments like convertible bonds, stock options, and warrants, assuming their conversion or exercise if they would decrease earnings per share or increase loss per share.⁹, ¹⁰, ¹¹

\text{Diluted EPS Denominator} = \text{Weighted Average Number of Ordinary Shares Outstanding} + \text{Dilutive Potential Ordinary Shares}

The calculation of the weighted average number of shares outstanding adjusts for events that change the number of shares without a corresponding change in resources, such as bonus issues, stock splits, and share consolidations.⁸

Interpreting the Adjusted Outstanding Shares

Interpreting adjusted outstanding shares is essential for understanding a company's per-share metrics and overall capital structure. A higher number of adjusted outstanding shares can dilute per-share earnings, while a lower number can enhance them. For example, when a company repurchases its own stock through a share buyback program, the number of adjusted outstanding shares decreases, which can boost earnings per share even if net income remains constant. Conversely, issuing new shares, perhaps to raise capital or for employee stock options, will increase the adjusted outstanding shares and can dilute existing shareholders' interests.

Hypothetical Example

Consider "Tech Innovations Inc." which started the year with 10 million shares outstanding.

On April 1, Tech Innovations Inc. issues 1 million new shares to acquire a smaller company.
On July 1, the company announces a 2-for-1 stock split.
On October 1, Tech Innovations Inc. repurchases 500,000 shares through a buyback program.

To calculate the weighted average adjusted outstanding shares for the year:

January 1 - March 31 (3 months): 10,000,000 shares
April 1 - June 30 (3 months): (10,000,000 + 1,000,000) = 11,000,000 shares
July 1 - September 30 (3 months): (11,000,000 * 2) = 22,000,000 shares (due to 2-for-1 split)
October 1 - December 31 (3 months): (22,000,000 - 500,000) = 21,500,000 shares

Weighted average calculation:

\left(10,000,000 \times \frac{3}{12}\right) + \left(11,000,000 \times \frac{3}{12}\right) + \left(22,000,000 \times \frac{3}{12}\right) + \left(21,500,000 \times \frac{3}{12}\right)

= 2,500,000 + 2,750,000 + 5,500,000 + 5,375,000 = 16,125,000 \text{ adjusted outstanding shares}

This weighted average figure would then be used in the denominator for calculating annual earnings per share, providing a more accurate reflection of the capital available throughout the year.

Practical Applications

Adjusted outstanding shares are a critical component in various financial analyses and regulatory filings. Investors and analysts rely on this figure to accurately calculate key per-share financial metrics, which are vital for valuation and performance analysis. Public companies are required by regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), to disclose their shares outstanding in periodic reports like Form 10-K and Form 10-Q.⁶, ⁷ This ensures transparency and comparability across different firms.

Furthermore, companies often manage their adjusted outstanding shares through actions like share buybacks or new share issuances, influencing their stock price and per-share financial indicators. For instance, a company might conduct a significant share buyback program to return capital to shareholders and potentially boost EPS. Such actions can be significant, with corporations increasing debt to fund these buybacks.⁵

Limitations and Criticisms

While essential for accurate financial reporting, the concept of adjusted outstanding shares is not without its limitations and criticisms. One common critique arises from the complexity of calculating diluted shares, which requires assumptions about the exercise of convertible securities and stock options. These assumptions may not always reflect actual investor behavior or market conditions.

Another point of contention can be the use of share buybacks to manipulate per-share metrics. Critics argue that reducing the number of outstanding shares through buybacks can artificially inflate earnings per share, making a company appear more profitable without necessarily improving its underlying business operations or revenue growth. Some economic researchers have explored whether stock buybacks contribute to long-term economic growth, finding that while they may not directly contribute, they can facilitate efficient capital allocation by redirecting funds to higher-growth firms.⁴

The timing of share issuances or buybacks throughout a reporting period also necessitates the use of a weighted average, which can still obscure intra-period fluctuations in the actual number of shares. This can make it challenging for some stakeholders to get a real-time understanding of the exact share count at any given moment.

Adjusted Outstanding Shares vs. Basic Outstanding Shares

Feature	Adjusted Outstanding Shares	Basic Outstanding Shares
Definition	A refined count of shares that accounts for various corporate actions and potential dilutive securities. This includes the weighted average over a period and the assumed conversion of dilutive instruments.	The total number of a company's shares of stock currently held by all shareholders, including individual, institutional, and restricted shares held by insiders. This is a simple count at a specific point in time.
Purpose	Used primarily for calculating diluted earnings per share (EPS) and other per-share metrics where the potential impact of future share issuances or conversions needs to be considered. It aims to provide a "worst-case" scenario for earnings dilution.	Used for calculating basic earnings per share (EPS), market capitalization, and other metrics that reflect the current ownership structure. It represents the shares genuinely traded or held by investors on the open market.
Considerations	Incorporates the effects of stock splits, stock dividends, reverse stock splits, and the hypothetical conversion of dilutive securities (e.g., convertible debt, stock options, warrants). It often uses a weighted average over a period to account for changes.	Reflects the actual number of shares issued by the company and held by shareholders, excluding treasury stock. It is a snapshot at a specific point in time, although it can fluctuate due to new issuances or buybacks.
Complexity of Calculation	More complex, as it requires assessing the dilutive impact of various financial instruments and often involves weighted averages.	Relatively straightforward, as it is a direct count of shares.

Confusion between these two terms often arises because "outstanding shares" is a broad term that can refer to the basic count, but "adjusted outstanding shares" specifically denotes the figure after accounting for the complexities required by financial reporting standards, particularly for diluted EPS calculations. The primary distinction lies in the inclusion of potential future shares that could dilute existing ownership for the adjusted figure, whereas basic outstanding shares represent only those currently in circulation.

FAQs

What causes a company's adjusted outstanding shares to change?

A company's adjusted outstanding shares can change due to various corporate actions, including issuing new shares (e.g., through a secondary offering or employee stock option exercises), repurchasing shares (share buybacks), stock splits or reverse stock splits, and stock dividends. The weighted average calculation also adjusts for these changes over a reporting period.

Why is it important to use adjusted outstanding shares for EPS calculations?

Using adjusted outstanding shares, particularly for diluted EPS, is important because it provides a more conservative and comprehensive view of a company's profitability per share. By including the potential impact of dilutive securities, it gives investors a clearer picture of the maximum potential dilution of their ownership interest, which is crucial for making informed investment decisions and comparing companies.

Where can I find information on a company's adjusted outstanding shares?

Information on a company's outstanding shares, which serves as the basis for adjusted outstanding shares, can typically be found in its financial statements, such as the balance sheet, and in regulatory filings with organizations like the SEC.³ Specifically, companies disclose the weighted average number of shares used in their EPS calculations within their income statements or accompanying notes to the financial statements.

Do all companies report adjusted outstanding shares?

Publicly traded companies are generally required to report both basic and diluted earnings per share, which necessitates the calculation of weighted average outstanding shares and adjusted outstanding shares (for dilution). This is governed by accounting standards such as IAS 33 for international companies.¹, ² Private companies, however, may not have the same rigorous reporting requirements.

How do stock splits affect adjusted outstanding shares?

A stock split increases the number of outstanding shares while reducing the share price proportionally, so the total market value of the company remains unchanged. For adjusted outstanding shares, a stock split is applied retroactively to all periods presented when calculating weighted average shares, ensuring comparability across periods. For example, in a 2-for-1 stock split, the number of shares would effectively double for all historical periods for calculation purposes.