Why Shares Outstanding are Important?

Why Shares Outstanding are Important?

What Are Shares Outstanding?

Shares outstanding are shares of a company that are currently traded on the secondary market and held by all its investors. Outstanding shares include all restricted shares owned by the company’s insiders, as well as share blocks owned by institutional investors. You can find shares of a company on its balance sheet under the section “Capital Stock.”

A company’s outstanding shares can fluctuate for a number of reasons. Let’s imagine that the company issued additional stocks, sold them to the public, and split stocks to gain some capital. In these situations, shares of a company will increase. Outstanding shares will decrease if the company buys back its already purchased shares.

Shares Outstanding are important because we use them to calculate many widely used financial metrics like market capitalization and EPS.

Example

Company X is a well-known retail company that sells clothes. The company issued 35,500 shares through an IPO. It also offered 5,000 shares to each of the three vice directors and has 7,500 treasury shares.

As an investor, you may want to know the company’s market capitalization and its earnings per share.

First, you need to calculate the total number of shares:

= Issued shares – Treasury shares

= 35,500 – 7,500 = 28,000

At present company X’s stock is trading at $35.02$. Thus, the market capitalization of the company is 28,000 * $35.02 = $980,560.

Company X’s latest earnings report shows a net income of $19,300. As a result, the earnings per share is equal to 19,300 / 28,000 = $0.689.

After several months, the company wants to repurchase 2,000 shares. The stock is trading at $33.49.

28,000 – 2,000 = 26,000, so the company’s market capitalization is then 26,000 * $33.49 = $870,740.

Because of fewer shares in the market, earnings per share go up as follows:
EPS = $19,300 / 26,000 = $0.742

In the end, as the number of outstanding shares decreases by 2,000, the company’s EPS increases by 7.69%.

To read more about Islamic Finance related topics, please click here and visit our academy.

Besides, feel free to sign up for our free stock screening services at musaffa.com.