When analyzing a company’s financial statements, one of the first questions I ask myself is, “How many outstanding shares does this company have?” Followed shortly by, “What does the share structure look like?”
By digging into the accompanying notes to the share capital, which can be found in the annual and quarterly financial reports, you can find information on the basic shares outstanding and the fully diluted shares outstanding. The difference between these two is shown in the table below:
Basic Shares Outstanding vs. Fully Diluted Shares Outstanding |
|
| Basic Shares Outstanding | Shares that have been issued and are outstanding, often referred to as common shares outstanding. |
| Fully Diluted Shares Outstanding | The total number of common shares that would be outstanding if all convertible securities, such as (employee) stock options and stock warrants, were exercised. |
Restricted shares are shares of a company that are not fully transferable until certain conditions have been met. Company insiders often hold restricted shares because they are in a lock-up period following an initial public offering. Shares that have been repurchased are called treasury shares and are held in the corporate treasury waiting to be cancelled or reissued. Treasury shares are not considered outstanding.
Floating shares refer to the total number of shares available for trading. The float is calculated by subtracting the restricted shares, insider ownership, and shares owned by shareholders who own at least 5% of the company’s total shares outstanding.
As an investor, it’s important to study the accompanying notes to the share capital. In these notes (mentioned on the company’s balance sheet), you can find information on whether the company has (employee) stock options and/or stock warrants outstanding, including their exercise prices and expiry dates. If your entry price in a stock is higher than the outstanding exercise prices of the employee stock options and/or stock warrants, your shares will be diluted as soon as they are exercised!
You should also be aware of outstanding flow-through shares and short positions.
Note: When analyzing a company’s financial statements, I always use the basic shares outstanding in my calculations. However, I also inform myself about what will happen to the shares outstanding and to the balance sheet when all in-the-money (i.e., when the exercise prices are lower than the current share price) and near-the-money (i.e., when there is a very small difference between the exercise price and the current share price) securities are converted into common shares.
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