Outstanding Shares
Categories: Company Valuation, Metrics
Okay, first things first: this is not a qualitative assessment of shares. Shares may be bad, awful, mediocre, good, or even outstanding, but that’s not what this term refers to.
It also doesn’t mean that they’re, uh...out standing in the rain. Rather, it is a technical term that reflects how many pieces make up the sum total of the ownership pie of a company.
Baby’sFirstChainsaw.com has 40 million slices and is currently trading for $15 a slice. Wow. Who knew toddlers were so into mechanical power tools? Or how sick and twisted the writers at Shmoop are? Anyway, if you didn’t catch the cleverness here, a slice equals a share. So the company has 40 million shares outstanding.They are trading at 15 bucks each. And that gives the company a market value of 600 million dollars.
That means that if someone wanted to buy the entire pie, they could, in theory, pay 600 million bucks, assuming everyone would sell to them for 15.
Can the shares outstanding change? Sure. Various factors change that number all the time. When an employee decides to either buy out or sell the stock options granted to her when she joined the company, those options convert into shares.
So if she had 10,000 options and sold them, the company would then have 10,000 fewer options outstanding, but would now have 40,010,000 shares outstanding. The options just converted into shares. Amen.
Okay...what if the company wanted to raise 30 million bucks to buy a small competitor for cash? It could sell to the public 2 million shares at 15 bucks a pop. Did it already own those shares? Likely not. So it had to print them out of thin air (ta-da!) and then sell them to new buyers. Add 2 million to the total, and now the company has 42,010,000 shares outstanding. It also has 30 million bucks more in cash on its balance sheet, by the way.
Now, there’s a danger in the increase in shares outstanding. It’s called share creep, and it refers to the gradual increase in shares outstanding. Because now, instead of a 600 million valuation with 40 million shares at 15 bucks, the company (if it were to still have a $600 million valuation) would see its stock price drop to $600 million divided by 42,010,000, or $14.28 a share. So in the process of the options being converted and the cash being raised, the company “destroyed” 72 cents a share in value.
What we’re omitting here is that the company raised 30 million of cash in this process…cash that we investors presume it will use wisely. And not on, you know…kibble for the office terrier.
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Finance: What Are Shares Outstanding?268 Views
Finance a la shmoop what are shares outstanding Okay first
things first this is not a qualitative assessment of shares
shares maybe bad awful mediocre good or even outstanding but
that's not what this term refers to it also doesn't
mean that they're you know out standing in the ring
paying dividends in the way that they don't do that
Sorry won't sing again Alright rather shares outstanding is a
technical term that reflects how many pieces make up the
sum total of the ownership pie of a company So
here is what baby's first chainsaw dot com looks like
it has forty million slices and is currently trading for
fifteen bucks a slice while new toddlers were so into
mechanical power tools or how sick and twisted the writers
it's from up Are you been here anyway If you
didn't catch the cleverness here a slice equals a share
so the company has forty million shares outstanding They're trading
at fifteen bucks age and that gives the company a
market value of six hundred million dollars That means that
if someone wanted to buy the entire pie they could
in theory pay six hundred million bucks assuming everyone would
Sell them all their shares for fifteen bucks each and
the shares outstanding Change Sure Bunch of factors change that
number all the time When an employee decides to either
buy out or sell the stock options granted to her
when she joined the company Well those options convert into
shares So if she had ten thousand options and sold
them the company would have then ten thousand fewer options
outstanding We're kind of like a liability but it would
now have forty million ten thousand shares outstanding The options
just converted into shares on men Okay what if the
company wanted to raise thirty million bucks to buy a
small competitors for all cash Well it could sell to
the public two million shares at fifteen bucks a pop
Did it already own those shares Well likely not They
weren't just sitting in the vault in treasury stock so
it had to print those shares out of thin air
to dot and then sell them to new buyers So
add two million to the total and now the company
has forty two million ten thousand shares outstanding It also
has thirty million bucks more in cash on its balance
Sheet by the way now there's a danger in the
increase in shares outstanding It's called share creep and it's
not this guy Rather it refers to the gradual increase
in shares outstanding otherwise known as dilution because now instead
of a six hundred million dollar valuation with forty million
shares at fifteen bucks the company if it were to
still have a six hundred million dollar valuation now it's
more shares outstanding would see its stock price drop teo
six hundred million divided by forty two million ten thousand
and yeah that gets you fourteen dollars in twenty eight
cents a share So in the process of the options
being converted and the cash being raised by selling equity
the company destroyed seventy two cents a share in value
Now in real life the market probably goes up and
makes account for all that What were omitting here is
that the company raised thirty million bucks of cash in
the process Cash that well we investors presume it will
use wisely and not on you know kibble for the 00:03:14.07 --> [endTime] office terrier