Weighted average shares are used to determine a company’s average number of outstanding shares during a specified period, which affects how earnings per share is measured. The calculation involves multiplying the number of shares outstanding by the percentage of time they were outstanding and adding the totals. This is necessary due to fluctuations in the number of outstanding shares caused by buying and selling. Accurate earnings per share calculation is crucial for investors and analysts.
Weighted average shares are measures used to determine the average number of shares a company has outstanding during a specified period of time. This is an important determination, as it affects how a company’s earnings per share is measured, a key benchmark for investors and analysts. It is necessary to calculate the weighted average number of shares each time a company issues new shares or repurchases some of its outstanding shares. Making this measurement requires first multiplying the number of shares outstanding in each time period by the percentage of the total time period those shares were outstanding, and then adding all the totals.
Companies that offer shares to investors rarely keep the same number of shares outstanding for extremely long periods of time. In some cases, you might want to raise money for trading by selling some shares. Conversely, a company that is flush with extra cash might want to buy back some of its own shares. All this buying and selling keeps the number of shares outstanding fluctuating, so the calculation of the weighted average number of shares is necessary.
As an example of how the weighted average stock works, imagine a company wants to calculate this number over the past year. They began the year with 1,000 shares outstanding. In early April, they bought 500 shares, leaving 500 outstanding. On July 1, they issued 1,000 more shares, meaning there were 1,500 shares outstanding. That’s where the number stayed for the rest of the year.
Since there were 1,000 shares outstanding for three months and then 500 shares for another three months, these two totals must be multiplied by 0.25. This is because three months is a quarter of the 12 months in a year. The 1,500 shares outstanding during the last six months are multiplied by 0.5, since six months is half the year. Those multiplications leave a total of 250, 125 and 750, and adding them together means that the company’s weighted average shares for the year are 1,125.
Knowing the weighted average shares makes calculating earnings per share for a company much more accurate than it would be if the company simply used one of the share totals from a certain point in the year. In the example above, the earnings would look quite different if they used the April share total instead of the weighted average. Since earnings per share is a great indicator of financial strength, accuracy is crucial.
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