One of the first questions I ask myself when analysing a company’s financial statements is: “How Many Outstanding Shares Does this Company Have?” Shortly followed by: “How Does the Share Structure Looks Like?”
When you dig into the accompanying notes to the share capital, which you will find in the annual and quarterly financial reports, you will find the basic shares outstanding and the fully diluted shares outstanding. The difference between them is shown in the following table.
Basic Shares Outstanding vs. Fully Diluted Shares Outstanding
|Basic Shares Outstanding||Shares which have been issued and are outstanding, often referred to as common
|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.
In the first note at the bottom of this page I will explain which number of outstanding shares I always use while analysing a company’s financial statement.
Restricted shares refer to shares of a company that are not fully transferable until certain conditions have been met. For example, company insiders often held restricted shares because they are in a lock-up period following an initial public offering.
Shares that have been repurchased are called treasury shares, because they 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. Thus, the float is calculated by subtracting the restricted shares, the insider ownership and the shares owned by shareholders who own at least 5% of the company’s total shares outstanding.
As an investor you should always study the accompanying notes to the share capital. In these notes (mentioned on the company’s balance sheet) you will see if the company has (employee) stock options and/or stock warrants outstanding, including their exercise prices and expiry dates. To find out why it is so important to study these accompanying notes you should read the second note at the bottom of this page.
I have created the following subpages to the share structure section:
|Employee Stock Options||How Do Stock Options Work. Read why employee stock options are
offered to the company’s employees and why you should not confuse them with the term
|Flow-Through Shares||What Are Flow Through Shares Really Worth. Read here why you
should always be cautious when Canadian listed resource companies turn to the markets to raise
capital by offering flow-through shares.
|Short Stock Positions||How to Short a Stock and Where To Find Short Interest Data. Next
to exemplifying how short sales work, I reveal which resources I use to find data about
short stock positions, short interest and days to cover.
|Stock Warrants||Where to Find a List of Outstanding Canadian Stock Warrants. I
will not only explain what a stock warrant is, but I will also inform you where to find a
list of outstanding Canadian stock warrants.
Note: I always use the basic shares outstanding in my calculations in order to analyse a company’s financial statements. However, I also inform myself what will happen to the shares outstanding and to the balance sheet when all the in-the-money (i.e. when the exercise prices are lower than the current share price) and near-they-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.
Note: Remember that 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 may also want to read...
- Mining Companies Analysis - Learn How to Invest in Mining Stocks. To execute your own mining companies analysis, I have created a lot of (sub)pages about the relevant terminology and working methods from the mining sector.
- Oil and Gas Companies Analysis - How to Invest in Energy Stocks. I created different pages about the relevant terminology and working methods from the energy sector to conduct your own analysis for oil and gas companies.
- Understanding the Stock Market - How Do Stocks Work. To help you with understanding the stock market, I have created some articles to explain how stocks work and I also reveal my own stock market analysis in this chapter.
- How to Invest in Shares - Learn How to Start Investing in Stocks. In this chapter I inform you how to invest in shares - the UndervaluedEquity.com way. I also reveal which (free) resources I use to execute my due diligence.
- How I Invest in Stocks - My Preconditions for Selecting Undervalued Stocks. In this chapter I answer the question: how do I invest in stocks? Thus, I explain which investment rules I follow whilst selecting companies for my stock portfolio.
- Stock Investment Analysis - A More Detailed Elaboration on How to Buy Stocks. When a company complies with my preconditions for selecting undervalued stocks, I will elaborate my stock investment analysis to assess the quality of it's assets, management, etc.