Weighted average value of outstanding shares
Because the number of shares outstanding is included in key calculations of financial metrics such as earnings per share, and because this number can change over time, a weighted average of the number of shares outstanding is often used in certain formulas.
For example, suppose a company with 100,000 shares outstanding decides to conduct a stock split, thereby increasing the total number of shares outstanding to 200,000. The company later reports a profit of $200,000. To calculate earnings per share for the entire time period included, the formula would be as follows:
(Net income – dividends on preferred shares (200,000)) / Shares outstanding (100,000 – 200,000)
But it remains unclear which of the two options for the value of outstanding shares to include in the equation: 100,000 or 200,000. In the first case, earnings per share would be $1, and in the second, earnings per share would be $2. To account for this inevitable change, financial calculations can more accurately use a weighted average of shares outstanding, which is calculated as follows:
(Shares outstanding x Reporting period A) + (Shares outstanding x Reporting period B)
In the example above, if reporting periods were semi-annual, the resulting weighted average shares outstanding would be 150,000. Thus, when restating the earnings per share calculation, $200,000 divided by 150,000 weighted average shares outstanding would be 1 .33 earnings per share.
What shares are outstanding?
Outstanding shares refer to a company's shares currently owned by all of its shareholders, including blocks of stock held by institutional investors and restricted stock held by company officers and insiders. Outstanding shares are shown on a company's balance sheet under the heading "Share Capital." The number of shares outstanding is used in calculating key metrics such as a company's market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS). A company's outstanding shares are not static and can fluctuate widely over time.
