Outstanding shares are a crucial metric for investors and analysts, providing insights into a startup's financial health and performance. They can also be used to calculate other key financial ratios such as cash flow per share (CFPS) and earnings per share (EPS). But are outstanding shares good or bad?
In this page, we will discuss everything you need to know about outstanding shares and how they can be beneficial for startups, including some potential drawbacks associated with them.
Outstanding shares meaning
Shares outstanding refer to the total number of a startup's stock shares currently held by all its shareholders, including institutional investors, insiders, and the general public. These are the shares that have been issued by a startup and are currently in market circulation, excluding treasury stock which is held by the startup itself.
The number of outstanding shares is not static and can change over time. A startup can issue new shares or buy back existing shares, which can affect the ownership and voting power of individual shareholders, and the startup’s overall market capitalization.
Key things you should know about outstanding shares
- The total number of outstanding shares is crucial in determining your startup's market capitalization, or the total value of its outstanding shares. To calculate market capitalization, multiply the current market share price by your startup’s total outstanding shares.
- Outstanding shares can be classified into different categories, such as common shares and preferred shares. Each category may have different voting rights, dividend rights, and other unique features.
- Outstanding shares are different from authorized shares. Authorized shares are the maximum number of shares that a company is allowed to issue. A startup may not issue more shares than its authorized share amount without getting approval from its shareholders.
How do outstanding shares affect a startup's finances & stock performance?
Outstanding shares can have a significant impact on your startup’s finances, stock performance, and how it is valued by investors. These shares can affect your company’s finances in terms of market capitalization.
For instance, if your startup has a larger number of outstanding shares, it will generally have a higher market capitalization, which will impact its ability to raise capital and access financing since it’s more attractive to lenders and investors.
Outstanding shares can also affect your startup's earnings per share (EPS). You can calculate EPS by dividing your startup's net income by the number of outstanding shares. As the number of total outstanding shares increases, EPS decreases, assuming the net income remains constant. EPS can impact investors' perceptions of your company's financial performance and may influence stock prices.
Shares outstanding can impact your startup's stock performance in terms of supply and demand. For example, having a large supply of outstanding shares available for trading could lead to lower stock prices. On the other hand, if you have fewer outstanding shares available for trading, the demand for the company's stock will increase, potentially leading to higher stock prices.
What is the difference between outstanding and authorized shares?
Authorized shares refer to the total number of shares that your startup is legally allowed to issue. The number of authorized shares is determined and stated in the startup’s charter or articles of incorporation. It represents the total number of shares that your startup is authorized to issue throughout its existence.
Shares outstanding, on the other hand, is the actual number of shares that a startup has issued and are currently held by its shareholders. These shares are owned by investors and are actively traded on stock exchanges.
How to calculate shares outstanding
Calculating shares outstanding is a crucial metric for investors to evaluate the value and potential risks associated with investing in a startup's stock. You can calculate outstanding shares by subtracting treasury stock (shares that are held by the company) from the total number of shares authorized for sale (shares issued).
Treasury shares plus outstanding shares equal the total number of shares issued. Shares outstanding may increase if a startup undertakes a stock split. So, it is essential to calculate the number of shares outstanding after a stock split.
Tips on how to find number of outstanding shares
- Check your startup's latest financial statements, which are available on the investor relations section of the company website or through the Securities and Exchange Commission's (SEC) quarterly filings database.
- Look for the section of the financial statements that provides information on the startup's capital structure, usually titled "Equity and Liabilities" or "Shareholders' Equity.”
- Find the line item that represents the total number of outstanding shares, which may be listed as "Common Shares Outstanding," "Common Outstanding Shares," or something similar.
- You can also find the number of outstanding shares on authoritative financial news websites or stock market data providers.
What is weighted average shares outstanding?
Weighted average shares outstanding is a metric for calculating the average number of a startup's stock shares that were outstanding during a specific reporting period. It takes into account any changes in the number of outstanding shares that occurred and calculates an average based on the time that each share was outstanding.
What are the benefits of having outstanding shares?
Here are some benefits of outstanding shares that you should consider:
- Increased liquidity: The more outstanding shares you have, the more opportunities there are for investors to buy and sell those shares, which can increase liquidity, making it easier for shareholders to buy or sell their shares.
- Access to capital: When startups issue new shares, they can raise additional capital to fund new projects, make acquisitions, or pay off debt. Increased access to capital can benefit both the startup and its shareholders, as it can be used to grow the business.
- Attracting talent: Startups can attract and retain top talent by offering stock options as part of their employees' compensation packages. This can be particularly beneficial for startups that need to build strong teams to succeed in a competitive market.
What are the risks of having outstanding shares?
Here are some risks of outstanding shares that you should consider:
- Dilution of ownership: When a startup issues new shares, it can dilute the value of existing shares and affect the shareholders’ ownership. This occurs because the new shares affect the percentage of the total outstanding shares, reducing the value of each existing share.
- Shareholder disputes: A larger number of outstanding shares means more shareholders who need to reach a consensus on crucial company matters which may then lead to disputes and conflicts.
- Takeover threats: When a company or startup has a large number of shares outstanding, it can make them more vulnerable to takeover attempts by other companies or investors who want to acquire a controlling interest.
- Increased regulatory requirements: Startups with a large number of outstanding shares may be subject to additional regulatory requirements, such as the need to file reports with the Securities and Exchange Commission (SEC) or to comply with shareholder voting rules.
Outstanding shares: Key takeaways
Understanding the basics of outstanding shares is critical for investors and startups alike. Startups should carefully consider their total outstanding share count and the potential impact it has on their financial metrics and market valuation.
While having a large number of shares outstanding can provide a startup with various benefits such as increased liquidity and access to capital, it can also come with risks such as dilution, shareholder disputes, and takeover threats.
Disclaimer: LTSE is neither a law firm nor provides legal advice. Before making decisions on matters covered by this post, readers should consult their legal adviser.