Average shares outstanding definition
/What is Average Shares Outstanding?
The average shares outstanding concept is used to calculate earnings per share information. The average shares outstanding figure is inserted into the denominator of the earnings per share calculation, to derive the earnings per share in a reporting period. The calculation of average shares outstanding is essentially a weighted average calculation, which results in a more accurate averaging outcome than if a simple averaging calculation were to have been used.
The amount of average shares outstanding can be impacted by a variety of actions that are authorized by a firm’s board of directors. These actions include the issuance of new stock, stock dividends, and stock splits. Because of these actions, average shares outstanding may change several times over the course of a year.
Presentation of Average Shares Outstanding
Average shares outstanding information is only reported by publicly-held companies; it is not necessary to report this information for privately-held, governmental, or nonprofit entities. It is never used for internal reporting by any entity, since management does not require per-share information for internal reports.
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Example of Average Shares Outstanding
A business has 100,000 shares outstanding at the beginning of January. It then issues 40,000 shares at the beginning of February, and 20,000 shares at the beginning of March. By the end of March, the total shares outstanding figure is 160,000. To calculate the average shares outstanding, we assume there were 100,000 shares outstanding in all of January, 140,000 shares outstanding in all of February, and 160,000 shares outstanding in all of March. When these three months are aggregated, the result is 400,000 shares. When we divide this figure by the three months of the measurement period, the average shares outstanding is 133,333 shares.
If a simple average had instead been used in the example, we would have added the beginning share balance to the ending share balance and divided by two, which would have resulted in an average shares figure of 130,000 shares.