by A company, while computing its earnings per share (EPS) for a defined period, derives the result by dividing the profit generated with the total number of shares outstanding. Here, apart from its profit factor, its earnings can also be affected by the shares outstanding, which is subject to change over time due to multiple factors.
A company thus resorts to a weighted average shares calculation to accurately determine its earnings. It utilises this calculation to arrive at a total of outstanding shares not only at the end of a period but also throughout such duration.
The number of shares in a company changes across a period due to factors like:
- Issue of shares
- Repurchase of shares
- Exercising employee stock option
- Existing shares retiring
- Stock split
- Warrant conversion
- Share buyback
The formula for EPS calculation goes as:
EPS = (Net Income of the Company – Dividend Paid to Preference Shareholders) / Weighted Average Shares Outstanding for the Said Period
The weighted average shares can thus be calculated in the following few steps.
- Identify the count of shares outstanding at the beginning of a concerned period. Also, account all changes in common shares throughout such period.
- Compute and list down an updated total of all common shares after each change.
Here, you must note that any new share issue increases a total count while share repurchase leads to a total share count reduction. Similarly, you must take into account the effects of all changes and compute the total outstanding after each change accordingly.
- Assign a weight to each outstanding share count based on the time gap between one change and the next.
If calculated in days, the weight assigned would be: Total outstanding days / 365
If calculated in months, the weight assigned would be: Total outstanding month / 12
With this weighted average number of shares formula, the calculation of a weighted average of outstanding shares can be accurately done for EPS computation.
